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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
                                       OR
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
     THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
     PERIOD FROM                   TO
 
                       COMMISSION FILE NUMBER: 001-13993
                            ------------------------
 
                         FREEDOM SECURITIES CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
    <S>                                           <C>
                     DELAWARE                                    04-3335712
         (STATE OR OTHER JURISDICTION OF                       (IRS EMPLOYER
          INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NO.)

     ONE BEACON STREET, BOSTON, MASSACHUSETTS                      02108
     (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                    (ZIP CODE)
</TABLE>
 
                                 (617) 725-2000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
Securities registered pursuant to Section 12(b) of the Act:
 
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<S>                                            <C>
                TITLE OF CLASS                   NAME OF EACH EXCHANGE ON WHICH REGISTERED
    Common Stock, par value $.01 per share         Common Stock, par value $.01 per share
</TABLE>
 
Securities registered pursuant to Section 12(g) of the Act:
 
                                      None
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
 
     At March 1 1999, the registrant had 19,638,927 shares of common stock
outstanding. The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant as of March 1, 1999 was
approximately $223,870,144 (based on the closing price on the New York Stock
Exchange on that date).
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Portions of the definitive Proxy Statement for the registrant's annual
meeting of shareholders to be held June 10, 1999 are incorporated by reference
into Part III of this Form 10-K.
 
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<PAGE>   2
 
                                     PART I
 
ITEM 1.  BUSINESS
 
FORWARD-LOOKING STATEMENTS
 
     This annual report on Form 10-K, including without limitation "Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 7A Quantitative and Qualitative Disclosures About Market
Risk," contains or incorporates both historical and "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Words such as
"anticipates", "believes", "expects", "intends", "future", and similar
expressions identify forward-looking statements. Any such "forward-looking"
statements in this report reflect the Company's current views with respect to
future events and financial performance, and are subject to a variety of factors
that could cause the actual results or performance to differ materially from
historical results or from the anticipated results or performance expressed or
implied by such forward-looking statements. Because of such factors, there can
be no assurance that the actual results or developments anticipated by the
Company will be realized or, even if substantially realized, that they will have
the anticipated results. The risks and uncertainties that may affect the
Company's business include, but are not limited to: volatility in the stock
markets, economic conditions, governmental regulations, technological advances
affecting the Company's industry, pricing and competition, retention of key
personnel, the Company's relationship with its clearing agent, the
communications and information systems of the Company and its business partners,
the sufficiency of financial resources to sustain and expand the Company's
operations, civil and enforcement liability related to operating in the
securities industry, and other factors described elsewhere in this report and in
prior filings with the Securities and Exchange Commission (the "Commission" or
"SEC"). Readers should not place undue reliance on such forward-looking
statements, which speak only as of the date hereof, and should be aware that
except as may be otherwise legally required of the Company, the Company
undertakes no obligation to publicly revise any such forward-looking statements
to reflect events or circumstances that may arise after the date hereof.
 
COMPANY OVERVIEW
 
     Freedom Securities Corporation ("the Company" or "Freedom"), through its
three brokerage subsidiaries, Tucker Anthony Incorporated ("Tucker Anthony"),
Sutro & Co. Incorporated ("Sutro") and Cleary Gull & Reiland Inc. ("Cleary
Gull"), and its asset management subsidiary, Freedom Capital Management
Corporation ("Freedom Capital"), is a full-service, regionally focused retail
brokerage and investment banking firm. The Company was formed in November 1996
to effect the acquisition (the "Acquisition") of Freedom Securities Holding
Corporation (the "Predecessor Company") and its subsidiaries, including Tucker
Anthony, Sutro, and Freedom Capital, from John Hancock Mutual Life Insurance
Company ("Hancock"). The Acquisition was financed through purchases of equity
securities by approximately 350 employees of the Company including senior
management and investment executives as well as affiliates of Thomas H. Lee
Company and SCP Private Equity Partners, L.P. and through borrowings under a
credit facility.
 
     Tucker Anthony, headquartered in Boston and focused primarily in the
northeastern United States, and Sutro, headquartered in San Francisco and
focused primarily in the western United States, are both over 100 years old and
have well established reputations in their respective regions. Cleary Gull,
headquartered in Milwaukee and with operations in Chicago and Denver, was
founded in 1987 and is an institutional capital markets, investment banking and
investment management services firm with a national client base. Cleary Gull was
acquired by the Company in the second quarter of 1998 and its acquisition was
accounted for using the purchase method of accounting. The consolidated
financial and other data included elsewhere in this report include the results
of Cleary Gull's operations from the date of acquisition. Management believes
that it can best serve the needs of these distinct regions through separate,
locally managed organizations, while avoiding cost duplication by using shared
clearing and support services. This approach enables the Company to capitalize
on each organization's name recognition, historical areas of expertise and close
community ties while lessening the Company's reliance on a single region's
economy. Tucker Anthony, Sutro and Cleary Gull clear their securities
transactions on a fully disclosed basis through Wexford Clearing Services
Corporation
 
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("Wexford" or "Clearing Broker"), a guaranteed wholly-owned subsidiary of
Prudential Securities Incorporated ("Prudential").
 
     The Company believes that its primary strengths are (i) the experience and
tenure of its investment executives, which have often led to long-term
relationships with clients in their respective communities; (ii) its high level
of employee commitment, evidenced by significant employee ownership in the
Company; (iii) its personalized, service-oriented culture emphasizing
responsiveness to client and regional market demands; (iv) its focus on emerging
and middle-market companies in targeted industries in which the Company has
specialized expertise or regional presence; and (v) its ability to manage and
control operating costs through centralization of certain services and other
cost effective solutions, including its clearing and processing arrangements
with Wexford.
 
     The Company's three main areas of focus, described below, are (i) its
full-service retail brokerage operations; (ii) its equity capital markets
activities; and (iii) its asset management operations.
 
  Retail Operations
 
     The retail operations of Tucker Anthony and Sutro, conducted in 14 states
and the District of Columbia, have together generated 51%, 58% and 58% of the
Company's operating revenues in 1998, 1997 and 1996, respectively, and have
historically represented the Company's core business. Management believes that
such retail services will continue to be the Company's leading source of revenue
for the foreseeable future. A large portion of the Company's revenues is
generated from commissions or fees earned as a broker or dealer for individual
clients in the purchase and/or sale of equity securities, fixed income
securities, mutual funds, insurance products, options and U.S. government and
municipal securities. As of December 31, 1998, Tucker Anthony had 480 investment
executives located in 11 states and the District of Columbia, and Sutro had 245
investment executives located in 3 states.
 
     In its retail operations, the Company focuses on maintaining and developing
strong client relationships through a dedicated community focus while providing
the breadth and quality of services and products offered by national brokerage
firms. Tucker Anthony and Sutro provide their retail clients with a broad range
of services delivered in a personalized, service oriented manner. In addition to
recommending and effecting transactions in securities, the Company makes
available equity research reports prepared by Tucker Anthony, Sutro, Cleary Gull
and other research analysts and offers services such as financial and tax
planning, trust and estate advice to its retail clients. The Company believes
that the personalized nature and range of services it provides to its retail
clients is a key factor in the success of its retail brokerage businesses.
 
     As of December 31, 1998, retail customers had approximately $32 billion of
assets in over 235,000 Tucker Anthony and Sutro brokerage accounts. Management
believes that the experience of its 725 investment executives and their strong
ties to their communities help differentiate the Company from its competitors
and enable the Company to more effectively access and serve its clients. The
Company's strategy of providing its investment executives with a high level of
support and the flexibility to operate in an entrepreneurial manner has allowed
the Company to recruit and retain highly effective, motivated investment
executives, many of whom have significant tenure at their local branch offices.
Management believes that Tucker Anthony and Sutro have been able to successfully
recruit and retain investment executives for a number of reasons including a
corporate culture which rewards performance, encourages employee ownership, and
provides advanced technology, competitive payouts, no discount sharing and a
service-driven rather than a product-driven environment.
 
     The Company intends to increase its commitment to customer service by
providing its investment executives with advanced account information systems
and flexibility in determining fee schedules for certain services based upon the
level of customer needs, and by providing an array of one-stop investment and
financial planning services. The Company plans to continue to improve the
profitability of its retail operations primarily by hiring additional
experienced and highly productive investment executives that are attracted to
Tucker Anthony and Sutro by their entrepreneurial cultures, the high level of
product offerings and technological support provided by the Company.
 
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  Equity Capital Markets
 
     The Company's equity capital markets groups consist of equity research,
investment banking, institutional sales, trading and syndication services. Each
of Tucker Anthony, Sutro and Cleary Gull has historically demonstrated strengths
in offering various investment banking services, including public offerings,
merger and acquisition services and private placements, to its clients. The
respective research and investment banking departments of Tucker Anthony, Sutro
and Cleary Gull target emerging and middle-market companies within the
industries in which they specialize, such as consumer products, healthcare,
financial services, distribution and logistics, technology and business services
industries. Within each of these industries, Tucker Anthony, Sutro and Cleary
Gull have focused on various industry niches which each believes offers it the
greatest opportunities. Each firm focuses its equity capital markets group on
coordinating its research, institutional sales, corporate finance, trading and
syndication functions. Management believes that its research will be a key
factor in growing its equity capital markets activities. The Company's operating
revenues from equity capital markets activities generated 22%, 17% and 16% of
the Company's operating revenues in 1998, 1997 and 1996, respectively.
 
     Tucker Anthony, Sutro and Cleary Gull execute securities transactions for
institutional investors such as banks, mutual funds, insurance companies and
pension and profit-sharing plans. These investors normally purchase and sell
securities in large quantities, which transactions require specialized marketing
and trading expertise. In order to service these institutional accounts, the
Company has established a network of institutional offices located in New York,
Boston, San Francisco, Los Angeles, Milwaukee, Chicago, Denver and Washington,
D.C.
 
     Institutional transactions are executed by the Company acting as agent or
principal. The Company permits discounts from its commission schedule to its
institutional customers. The size of such discounts varies with the size of
particular transactions and other factors. The Company believes that it receives
a significant portion of its institutional brokerage commissions as a
consequence of its research advice and services regarding specific corporations
and industries, its principal transactions business and its investment banking
activities.
 
     The Company's investment banking and underwriting activities are performed
by the corporate finance, public finance and syndicate departments of Tucker
Anthony, Sutro and Cleary Gull. The corporate finance groups manage and
underwrite public offerings of equity and, to a significantly lesser extent,
debt securities, arrange private placements of equity and debt securities and
provide financial advice in connection with mergers and acquisitions,
divestitures and other corporate reorganizations and restructurings. The managed
public equity offerings and merger and acquisition transactions of Tucker
Anthony, Sutro and Cleary Gull are typically undertaken for emerging or
middle-market companies in the consumer products, healthcare, financial
services, distribution and logistics, technology and business services sectors
or companies located in each firm's respective geographic region.
 
     Historically, the Company's merger and acquisition advisory business has
been a significant component of the Company's investment banking revenues. The
Company believes that it has a well established merger and acquisition advisory
business and plans to capitalize on this strength by further building upon the
equity capital markets groups of Tucker Anthony, Sutro and Cleary Gull.
 
     The syndicate departments coordinate the distribution of managed and
co-managed corporate securities offerings and accept invitations to participate
in underwritings managed by other investment banking firms.
 
     The Company, through certain subsidiaries and employee incentive
arrangements, has from time to time in the past and may from time to time in the
future participate as an equity investor in connection with specific
transactions.
 
     The Company intends to continue to increase its equity capital markets
activities by committing greater resources to and carefully focusing its
research and investment banking coverage on geographical regions and industries
which management believes offer the greatest opportunities. Management also
believes that consolidations within the investment banking industry, as a whole,
will offer enhanced opportunities for those firms which maintain their local and
industry specific focus.
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  Asset Management
 
     The Company provides investment advisory and portfolio management services
to institutions, pension and endowment funds, money market funds, professional
firms, individuals and trusts. The asset management business consists of Freedom
Capital Management, Cleary Gull's Investment Management Services group and asset
management business from Tucker Anthony and Sutro. As of December 31, 1998,
total assets under management were over $9.0 billion. Asset management revenues
in 1998 increased 38% over the prior year and have represented 11%, 10% and 10%
of the Company's total operating revenues in 1998, 1997 and 1996, respectively.
 
     Freedom Capital, headquartered in Boston, was formed in 1930. Freedom
Capital has developed a leading position in the management of public funds for
Massachusetts municipalities and agencies, has developed an increasing presence
in certain sectors of the union pension fund market and is growing its corporate
funds management business. As with other aspects of the Company's business,
Freedom Capital is focused on service and client communication. To foster active
and attentive management, Freedom Capital limits the number of client
relationships of each portfolio manager. This policy is intended to provide each
portfolio manager with the time necessary to foster ongoing client relationships
and the opportunity to discuss portfolio strategies with the client. Freedom
Capital offers comprehensive client statements which include portfolio
appraisals, performance analyses and statements of transactions. In addition,
Freedom Capital provides its clients with economic commentary and investment
letters on a regular basis. Freedom Capital believes that its many strong,
long-term client relationships attest to its attention to service and client
communication.
 
     Freedom Trust Company, a New Hampshire chartered trust company and a
subsidiary of Freedom Capital, commenced operations in early 1996 to provide
clients the opportunity to place their assets in trust so that the Company may
continue to provide asset management services to such trusts after the client's
death. Freedom Trust Company had assets under custody of $722 million as of
December 31, 1998.
 
     The Company intends to enhance the profitability of its asset management
business by acquiring other money management businesses to increase both assets
under management and the number of investment professionals providing services
and by creating products to be marketed by Freedom Capital. The Company also
intends to increase the productivity and profitability of Freedom Capital
through improved coordination with the Tucker Anthony and Sutro brokerage
networks and other initiatives intended to allow Freedom Capital to manage a
larger percentage of funds held by Tucker Anthony and Sutro clients.
 
  Trading and Other Broker-Dealer Activities
 
     Tucker Anthony, Sutro and Cleary Gull make markets, buying and selling as
principal, in common stocks, convertible preferred stocks, warrants and other
securities traded on Nasdaq or in other OTC markets. As of December 31, 1998,
the Company made markets in equity securities of over 535 issuers. Such
securities are principally those in which there is substantial continuing client
interest and include securities which the Company has underwritten or on which
it provides research opinions. The Company also effects transactions in blocks
of securities, usually with institutional investors and generally involving
10,000 or more shares of listed stocks. Such transactions are handled on an
agency basis to the extent possible, but the Company may take a long or short
position as principal to the extent that no buyer or seller is immediately
available. By engaging in block positioning, the Company places a portion of its
capital at risk to facilitate transactions for clients.
 
     The Company provides clients access to a range of fixed income products
including municipal securities, U.S. government and agency securities, mortgage
related securities including those issued through Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corp. ("FHLMC"), and corporate investment-grade and
high-yield bonds. The Company takes positions on a principal basis in municipal,
U.S. government, agency and corporate securities to facilitate transactions for
its clients. Additionally, trading activities include the purchase of securities
under agreements to resell at future dates (reverse repurchase agreements) and
the sale of the same or similar securities under agreements to repurchase at
future dates (repurchase agreements). The Company
 
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actively participates on a principal basis in the mortgage-backed securities
markets through the purchase or sale of GNMA, FNMA, FHLMC, mortgage pass-through
securities, collateralized mortgage obligations and other mortgage related
securities, in order to meet client needs. The Company finances its trading
positions as part of its Wexford clearing arrangement, through overnight
borrowings and repurchase agreements.
 
     Tucker Anthony and Sutro are each municipal securities dealers in both the
primary and secondary markets, buying and selling securities for their own
accounts and for clients. Revenues derived from these activities include
underwriting and management fees, selling concessions and trading profits.
 
     The public finance departments of Tucker Anthony and Sutro provide
financial consulting, advisory and underwriting services to cities and public
service districts. These subsidiaries manage and underwrite offerings of
municipal securities to finance the construction and maintenance of a broad
range of public-related facilities, including healthcare, housing, education,
public power, water and sewer, airports, highways and other infrastructure
needs. Over the last several years, the public finance industry has generally
experienced diminishing spreads and a lower number of publicly financed
projects. Nevertheless, both firms experienced increasing profitability in this
sector in 1997 and 1998 by concentrating on regionally focused community
projects.
 
     Tucker Anthony engages in the purchase and sale of convertible and equity
securities to take advantage of market price differences. Tucker Anthony's
arbitrage activities include both convertible and risk arbitrage. To the extent
that purchase and sale transactions are not simultaneous, or the closing of a
position is subject to a subsequent event such as the successful consummation of
a corporate merger, Tucker Anthony places a portion of its capital at risk.
Sutro and Cleary Gull do not engage in significant arbitrage activities. In
1998, arbitrage revenues represented less than three percent of the Company's
net revenues.
 
     Tucker Anthony and Sutro hold memberships in the New York Stock Exchange
(the "NYSE") and in other major securities exchanges in the United States in
order to provide services to their brokerage clients in the purchase and sale of
listed securities.
 
     The Company's wholly-owned subsidiary, Freedom Specialist Inc., has a 25%
interest in the profits and losses of a joint specialist account in which it
participates with two other NYSE specialist firms, RPM Specialist Corp. and R.
Adrian & Co. Specialists are responsible for executing transactions and
maintaining a fair and orderly market in securities under NYSE rules and
regulations. In this function, the specialist firm acts as an agent in executing
orders entrusted to it and/or acts as a dealer on the opposite side of public
orders in the security executed on the floor of the NYSE. As of December 31,
1998, the specialist firm acted as a specialist in 36 equity issues. Stock
settlement and clearing activities for the joint specialist account are provided
by RPM Clearing Corporation.
 
     Retail client securities transactions are executed on either a cash or
margin basis. In a retail margin transaction, credit is extended to a client
through the Wexford clearing arrangement for the purchase of securities, using
the securities purchased and/or other securities in the client's account as
collateral for amounts loaned. The Company receives income from interest charged
on such extensions of credit. The financing of margin purchases can be an
important source of revenue to the Company, since the interest rate paid by the
client on funds loaned through Wexford exceeds the Company's interest costs for
net customer debit balances paid to Wexford. The amount of the Company's gross
interest revenues is affected not only by prevailing interest rates, but also by
the volume of business conducted on a margin basis. By permitting a client to
purchase on margin, the Company takes the risk that the client will not perform
its obligations under the margin loan to maintain adequate collateral in the
event that market declines reduce the value of the collateral below the
principal amount loaned. Amounts loaned are limited by margin regulations of the
Board of Governors of the Federal Reserve System and other regulatory
authorities and are subject to credit review and daily monitoring by Wexford,
Tucker Anthony, Sutro and Cleary Gull.
 
INITIAL PUBLIC OFFERING AND EMPLOYEE OWNERSHIP
 
     On April 2, 1998, the Company completed its initial public offering of 7.4
million shares plus an over-allotment of 1.1 million shares (the "Offering"),
including 4.2 million shares of common stock ("Common
 
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Stock") sold by the Company. The Offering raised approximately $75.7 million for
the Company, after deducting underwriting discounts, commissions and expenses.
The Company used the proceeds and available cash to repay $77.5 million of debt.
The Common Stock is listed on the New York Stock Exchange under the symbol
"FSI".
 
     In connection with the Offering, employees sold no shares of the Company's
Common Stock and purchased their entire allocation of 335,000 shares. As of
December 31, 1998, the Company's employees, including senior management and
investment executives, owned approximately 33% of the Company's outstanding
Common Stock, including shares purchased in the open market. Management believes
that significant employee ownership has resulted in progressively higher levels
of employee motivation, confidence and commitment.
 
     Incentive equity programs, which are subject to various performance and
vesting requirements, have been established pursuant to which employees have
acquired or may acquire additional equity of the Company. As of December 31,
1998, option shares that have been granted or are authorized for grants under
these programs, when added to shares then owned, would result in employees
owning approximately 46% of the shares of Common Stock outstanding.
 
STRATEGIC ACQUISITIONS
 
     Management believes that attractive acquisition opportunities exist
particularly among smaller regional firms that want to affiliate with a larger
firm while still retaining their regional identity, focus and entrepreneurial
culture, as Tucker Anthony and Sutro have been able to do. In addition, the
Company believes that the consolidation trends in the brokerage and asset
management businesses will allow it to hire proven investment professionals who
prefer the culture and opportunities inherent in a smaller, entrepreneurial and
independent firm. Management believes that acquisitions may also allow the
Company to realize cost benefits by leveraging its infrastructure. Since its
public offering, the Company has completed three important acquisitions.
 
  Cleary Gull
 
     On May 1, 1998, the Company completed its acquisition of Cleary Gull, a
privately held investment banking, institutional brokerage and investment
advisory firm headquartered in Milwaukee, Wisconsin. Cleary Gull was established
in 1987 as a private investment bank focusing on the equity capital markets
through institutional research, sales and trading, and investment banking
services. Cleary Gull's research analysts cover such areas as distribution and
logistics, healthcare, business services, technology and growth companies in the
upper midwestern United States. Cleary Gull's equity capital markets activities
include a national institutional sales force and over-the-counter and listed
trading services. Cleary Gull's investment banking activities are focused
primarily on merger and acquisition advisory services and financing assignments
in both public and private equity and debt markets. Cleary Gull recently
established its Investment Management Services group to provide retail brokerage
and investment management services to institutional accounts and high net worth
individuals.
 
  Hopper Soliday & Co., Inc.
 
     On January 19, 1999, the Company completed its acquisition of Hopper
Soliday & Co., Inc. ("Hopper Soliday"), and merged it with Tucker Anthony.
Hopper Soliday is an investment and municipal banking firm, founded in 1872 and
based in Lancaster, Pennsylvania. The acquisition of Hopper Soliday, which had
1998 revenues of approximately $20 million, enhances the Company's investment
and municipal finance business and provides greater penetration into markets in
Pennsylvania.
 
  Charter Investment Group, Inc.
 
     On February 1, 1999, the Company, through its Sutro subsidiary, acquired
Charter Investment Group, Inc. ("Charter"), a brokerage firm based in Portland,
Oregon. Charter, which had 1998 revenues of approximately $7.5 million and
approximately $900 million in brokerage accounts as of December 31, 1998,
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will add 28 investment executives to the Company's retail operations and provide
market penetration into Oregon.
 
RELATIONSHIP WITH WEXFORD
 
     The Company clears all transactions, and carries accounts for customers and
proprietary accounts, with Wexford. Wexford furnishes the Company with
information necessary to run the Company's business, including commission runs,
transaction summaries, data feeds for various reports including compliance and
risk management, execution reports, trade confirmations and monthly account
statements; cashiering functions and the handling of margin accounts. As a
result of its arrangement with Wexford, the Company has achieved substantial
savings in its clearing and related operations. Under the Wexford arrangement,
management believes that the Company's cost of clearing its transactions is very
competitive with the industry's costs. The Company pays a fixed fee per trade,
subject to an aggregate annual minimum payment, for clearing trades through
Wexford.
 
     Consistent with its strategy of providing its investment executives with a
high level of support, following the April 1996 conversion to the Wexford
clearing arrangement, the Company retained approximately 50 of its clearing
operation employees to serve as an interface between Wexford and the Company's
investment executives. The Company's retention of these employees allows its
investment executives to deal exclusively with Company employees in connection
with any client inquiries or problems. In addition to providing the Company and
its investment executives with access to advanced technology without substantial
capital investment by the Company, the Company's relationship with Wexford
enables the Company to provide its clients with benefits resulting from this
technology. The Company allows clients, for a fee, to access information
concerning their accounts and other market information from their own personal
computers and has acquired technology that will enable its investment executives
to communicate with its customers through electronic mail, subject to regulatory
requirements. The agreement between the Company and Wexford has a fixed term of
five years, with provisions for negotiated extensions.
 
     The Company has an uncommitted financing arrangement with Wexford pursuant
to which the Company finances its customer accounts, certain broker-dealer
balances and firm trading positions through Wexford. Although the customer
accounts and such broker-dealer balances are not reflected on the Company's
statements of financial condition, the Company has agreed to indemnify Wexford
for losses it may sustain in connection with accounts of the Company's customers
and therefore retains risk with respect thereto. The Company seeks to control
the risks associated with these activities by requiring customers to maintain
margin collateral in compliance with various regulatory and internal guidelines.
The Company and Wexford monitor required margin levels daily and, pursuant to
such guidelines, request customers to deposit additional collateral or reduce
securities positions when necessary.
 
SEGMENT REPORTING
 
     In order to meet new requirements of generally accepted accounting
principles, the Company is reporting business segment information for the first
time. The Company has two reportable segments: broker-dealer and asset
management. The Company's broker-dealer segment includes its retail operations,
investment banking, research, institutional sales and syndication service
businesses as well as its OTC, fixed income and arbitrage trading activities.
The asset management segment consists of Freedom Capital Management as well as
Tucker Anthony's and Sutro's managed account products and Cleary Gull's
Investment Management Services group. For further information, see Note 20 of
the audited financial statements contained in Item 8 of this report.
 
EMPLOYEES
 
     As of December 31, 1998, the Company had a total of 1,998 employees, of
whom 1,273 were engaged in retail brokerage, 64 in institutional sales, 66 in
research, 135 in trading, 119 in investment banking, 65 in asset management, 67
in operations and trade support, 38 in exchange floor brokerage and order room,
34 in systems, technology and communications and 137 in legal and compliance,
accounting, and other administrative areas. Of these employees, 1,296 were
classified as professionals and 702 were classified in support
 
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positions. None of the Company's employees is subject to a collective bargaining
agreement. The Company believes that its relations with its employees generally
are good.
 
EFFECTS OF INTEREST RATES
 
     The Company's business is affected by general economic conditions,
including movements of interest rates. The Company's inventory of fixed income
securities may fluctuate as interest rates change, and the Company's interest
income and interest expense may likewise change as interest rates change.
However, interest rates have indirect effects on other aspects of the Company's
business as well.
 
     As interest rates increase, the price of equity securities may decline,
partially reflecting the increased competition posed by more attractive rates on
fixed income securities and partially reflecting the fact that interest rate
increases may tend to dampen economic activity by increasing the cost of capital
for investment and expansion, thereby reducing corporate profits and the value
of securities. As interest rates decline, securities may tend to rise in value.
The impact of these changes may affect the Company's inventory of securities,
which may change in value, and may also affect the profitability of the
Company's investment banking activities. Retail commission revenue may also be
affected by changes in interest rates and any resulting indirect impact on the
value of securities.
 
     The Company's asset management revenues are derived from fees which are
generally based on the market value of assets under management. Consequently,
significant fluctuations in the values of securities, which can occur as a
result of changes in interest rates or changes in other economic factors, may
materially affect the amount of assets under management and thus the Company's
revenues and profitability.
 
COMPETITION
 
     All aspects of the Company's business and of the securities industry in
general are highly competitive. The Company competes directly with national and
regional full-service broker-dealers, and to a lesser extent with discount
brokers and dealers, investment banking firms, investment advisors and certain
commercial banks. The Company also anticipates that recent and pending
legislative and regulatory initiatives intended to ease restrictions on the sale
of securities by commercial banks will increase competition from domestic and
international banks. In addition, the Company competes indirectly for investment
assets with insurance companies and others.
 
     The financial services industry has recently undergone significant
concentration as numerous securities firms have either ceased operations or been
acquired by or merged into other firms. These mergers and acquisitions have
further concentrated equity capital and other financial resources in the
industry and increased competition. Many of the Company's competitors use their
greater financial capital and scope of operations to offer their customers more
product offerings, broader research capabilities, access to international
markets and other products and services not offered by the Company.
 
     Competition from entities offering electronic and/or discount brokerage
services could increase competition in the securities industry. Competitors
offering Internet-based or other electronic brokerage services may have lower
costs and offer their customers more attractive pricing than other service
providers in the industry. The Company also anticipates additional competition
from underwriters who will attempt to conduct offerings of securities for
emerging and middle-market companies through new distribution channels such as
the Internet. Issuers may bypass financial intermediaries altogether and offer
their shares directly to purchasers through the Internet and other electronic
channels.
 
     In addition, the Company faces competition for investment professionals.
Although the Company takes steps to maintain strong relationships with its
investment executives, the demand for investment executives has increased and
employers in the industry are increasingly offering guaranteed contracts,
upfront payments and increased compensation in an attempt to attract and retain
qualified personnel. The Company generally does not enter into written
employment agreements with its investment professionals.
 
     The Company believes that the principal competitive factors influencing the
Company's business are: (1) the qualifications and experience of its
professional staff; (2) its reputation in the marketplace; (3) its
 
                                        8
<PAGE>   10
 
existing client relationships; (4) its ability to commit capital to client
transactions; (5) the mix of market capabilities offered by the Company; and (6)
the adequacy of its capital levels and its ability to raise additional capital.
 
REGULATION
 
     The securities and commodities industry is one of the nation's most
extensively regulated industries. Moreover, the regulations are subject to
change at any time, which can affect competition in the industry, capital
requirements and the Company's compliance costs.
 
     The Commission is responsible for carrying out the federal securities laws
and serves as a supervisory body over all national securities exchanges and
associations. In many respects, the regulation of broker-dealers has been
delegated by the federal securities and commodities laws to self-regulatory
organizations ("SROs"). These SROs include all the national securities and
commodities exchanges, the National Association of Securities Dealers (the
"NASD") and the Municipal Securities Rulemaking Board (the "MSRB"). Subject to
review by the Commission and the Commodity Futures Trading Commission (the
"CFTC"), these SROs adopt rules that govern the industry and conduct periodic
examinations of the operations of certain subsidiaries of the Company. The NYSE
has been designated as the primary regulator of certain of the Company's
subsidiaries including Tucker Anthony and Sutro. In addition, these subsidiaries
are subject to regulation under the laws of the 50 states, the District of
Columbia, Puerto Rico and certain foreign countries in which they are registered
to conduct securities, investment banking, insurance or commodities business.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales methods, trade practices, use and
safekeeping of customers' funds and securities, capital structure of securities
firms, record-keeping and the conduct of directors, officers and employees.
Violation of applicable regulations can result in the revocation of
broker-dealer licenses, the imposition of censures or fines and the suspension
or expulsion of a firm, its officers or employees.
 
     As registered broker-dealers or member firms of the NYSE, Tucker Anthony,
Sutro, Cleary Gull and Freedom Specialist Inc. are subject to certain net
capital requirements set forth in Rule 15c3-1 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and NYSE Rule 325. Freedom
Distributors Corporation, a subsidiary of Freedom Capital, is also subject to
Rule 15c3-1. The Net Capital Rules, which specify minimum net capital
requirements for registered broker-dealers, are designed to measure the
financial soundness and liquidity of broker-dealers. The Net Capital Rules also
(i) require that broker-dealers notify the Commission, in writing, two business
days prior to making withdrawals or other distributions of equity capital or
lending money to certain related persons if those withdrawals would exceed, in
any 30-day period, 30% of the broker-dealer's excess net capital, and that they
provide such notice within two business days after any such withdrawal or loan
that would exceed, and in any 30-day period, 20% of the broker-dealer's excess
net capital; (ii) prohibit a broker-dealer from withdrawing or otherwise
distributing equity capital or making related party loans if after such
distribution or loan, the broker-dealer's net capital is less than 120% of its
minimum net capital dollar amount or if the aggregate indebtedness of the
broker-dealer's consolidated entities would exceed 1,000% of the broker-dealer's
net capital and in certain other circumstances; and (iii) provide that the SEC
may, by order, prohibit withdrawals of capital from a broker-dealer for a period
of up to 20 business days, if the withdrawals would exceed, in any 30-day
period, 30% of the broker-dealer's excess net capital and if the SEC believes
such withdrawals would be detrimental to the financial integrity of the firm or
would unduly jeopardize the broker-dealer's ability to pay its customer claims
or other liabilities. Under NYSE Rule 326, a broker-dealer that is a NYSE member
is required to reduce its business if its net capital (after giving effect to
scheduled maturities of subordinated indebtedness or other planned withdrawals
of regulatory capital during the following six months) is less than either 125%
of its minimum net capital dollar amount or 4% of aggregate debit items (or 6%
of the funds required to be segregated pursuant to the Commodity Exchange Act)
for fifteen consecutive days. NYSE Rule 326 also prohibits the expansion of a
member's business if its net capital (after giving effect to scheduled
maturities of subordinated indebtedness or other planned withdrawals of
regulatory capital during the following six months) is less than either 150% of
its minimum net capital dollar amount or 5% of aggregate debit items (or 7% of
the funds required to be segregated pursuant to the Commodity Exchange Act) for
fifteen consecutive days. For information
 
                                        9
<PAGE>   11
 
concerning compliance by the Company's subsidiaries with the Net Capital Rules,
see Note 14 of the audited financial statements included in Item 8 of this
report.
 
     The Company also is subject to "Risk Assessment Rules" imposed by the
Commission which require, among other things, that certain broker-dealers
maintain and preserve certain information, describe risk management policies and
procedures and report on the financial condition of certain affiliates whose
financial and securities activities are reasonably likely to have material
impact on the financial and operational condition of the broker-dealers. Certain
"Material Associated Persons" (as defined in the Risk Assessment Rules) of the
broker-dealers and the activities conducted by such Material Associated Persons
may also be subject to regulation by the Commission. In addition, the
possibility exists that, on the basis of the information it obtains under the
Risk Assessment Rules, the Commission could seek authority over the Company's
unregulated subsidiaries either directly or through its existing authority over
the Company's regulated subsidiaries.
 
     Tucker Anthony, Sutro, Cleary Gull, Freedom Capital and other subsidiaries
are registered with the Commission as investment advisors under the Investment
Advisors Act of 1940 (the "Advisors Act") and are subject to the requirements of
regulation pursuant to both the Advisors Act and certain state securities laws
and regulations. Such requirements relate to, among other things, limitations on
the ability of investment advisors to charge performance-based or non-refundable
fees to clients, record-keeping and reporting requirements, disclosure
requirements, limitations on principal transactions between an advisor or its
affiliates and advisory clients, as well as general anti-fraud prohibitions. The
state securities law requirements applicable to registered investment advisors
are in certain cases more comprehensive than those imposed under federal
securities laws.
 
     As registered investment advisors under the Advisors Act, Tucker Anthony,
Sutro, Cleary Gull, Freedom Capital and certain other subsidiaries of the
Company are subject to regulations which cover various aspects of the Company's
business, including compensation arrangements. Under the Advisors Act, every
investment advisory agreement with the Company's clients must expressly provide
that such contract may not be assigned by the investment advisor without the
consent of the client. Under the Investment Company Act of 1940 (the "Investment
Company Act"), every investment advisor's agreement with a registered investment
company must provide for the agreement's automatic termination in the event it
is assigned. Under both the Advisors Act and the Investment Company Act, an
investment advisory agreement is deemed to have been assigned when there is a
direct or indirect transfer of the Agreement, including a direct assignment or a
transfer of a "controlling block" of the firm's voting securities or, under
certain circumstances, upon the transfer of a "controlling block" of the voting
securities of its parent corporation. A transaction is not, however, an
assignment under the Advisors Act or the Investment Company Act if it does not
result in a change of actual control or management of the investment advisor.
Any assignment of the Company's investment advisory agreements would require, as
to any registered investment company client, the prior approval of a majority of
its shareholders, and as to the Company's other clients, the prior consent of
such clients to such assignments.
 
     The Company is also subject to the risk of losses as a result of customer
fraud, employee errors, misconduct and fraud (including unauthorized
transactions by traders) and failures in connection with the processing of
securities transactions. In the fourth quarter of 1997, the Company determined
that a former employee improperly valued securities positions of the Company
over the first eleven months of 1997 in order to conceal trading losses of $2.6
million. The Company recognized these losses in its 1997 financial results as
follows: $228,000 in the first quarter, $1,071,000 in the second quarter,
$431,000 in the third quarter and $901,000 in the fourth quarter. The Company
notified the Securities and Exchange Commission and the NYSE of this situation.
The Company has conducted an internal review of the specific trading loss and
the Company's reports and procedures relating thereto, and the Company has
enhanced procedures where appropriate. The Commission is investigating this
matter. The Company does not expect that the results of this investigation will
have a material adverse effect on the Company's business, financial condition or
operating results.
 
                                       10
<PAGE>   12
 
ITEM 2.  PROPERTIES
 
     The principal executive offices of the Company are located at One Beacon
Street, Boston, Massachusetts under a lease expiring December 31, 2005. The
Company is currently leasing approximately 104,000 square feet at that location.
 
     The Company also leases approximately 88,000 square feet (of which 18,000
square feet has been sublet) at One World Financial Center, 200 Liberty Street,
New York, New York, under a lease expiring in January 2005; 64,000 square feet
(of which 8,000 square feet has been sublet) at 201 California Street, San
Francisco, California under a lease expiring on July 31, 2003; 25,000 square
feet at 555 South Flower Street, Los Angeles, California under a lease expiring
July 31, 2002; and 24,000 square feet at 100 East Wisconsin Avenue, Milwaukee,
Wisconsin, under a lease expiring January 31, 2006. For the year ended December
31, 1998, the Company's net expenses for occupancy and equipment operating
leases were $18.3 million. The properties are shared by the Company's two
reportable segments; there are no properties being used exclusively by one
segment or the other. The Company believes that its existing facilities will be
adequate for the foreseeable future.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     The Company and its subsidiaries are parties to various civil actions and
arbitrations incidental to its securities business. Some of these legal actions
involve claims for substantial amounts. The defense of such legal proceedings
may divert the attention of the Company's management, and the Company may incur
significant legal expenses in defending such claims or litigation. While the
ultimate outcome of these matters cannot be ascertained at this time, it is the
opinion of management that the resolution of such suits will not have a material
adverse effect on the Company's consolidated financial position or results of
operation.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     None.
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The following table sets forth information regarding the executive officers
of the Company as of March 1, 1999. The executive officers of the Company hold
office until their successors are appointed and qualify.
 
<TABLE>
<CAPTION>
                                                                                       EXECUTIVE OFFICER
                                                                                         OF THE COMPANY
                                                                                       OR THE PREDECESSOR
                 NAME                    AGE                  POSITION                   COMPANY SINCE
                 ----                    ---                  --------                 ------------------
<S>                                      <C>   <C>                                     <C>
John H. Goldsmith......................  57    Chairman of the Board of Directors and         1988
                                               Chief Executive Officer of the Company
                                               and Chief Executive Officer of Tucker
                                               Anthony Incorporated
William C. Dennis, Jr..................  55    Executive Vice President and Chief             1997
                                               Financial Officer of the Company
John F. Luikart........................  49    Director of the Company and Chairman           1995
                                               and Chief Executive Officer of Sutro
Kevin J. McKay.........................  50    Executive Vice President, General              1994
                                               Counsel and Secretary of the Company
David P. Prokupek......................  37    Director of the Company and President          1998
                                               and Chief Executive Officer of Cleary
                                               Gull
Robert H. Yevich.......................  50    Director of the Company and President          1995
                                               of Tucker Anthony
</TABLE>
 
                                       11
<PAGE>   13
 
     JOHN H. GOLDSMITH. Mr. Goldsmith joined Freedom Securities Holding
Corporation (the Predecessor Company to Freedom) in 1988 and has served as
Chairman, Director and Chief Executive Officer of the Predecessor Company as
well as Chief Executive Officer of Tucker Anthony since that time. Mr. Goldsmith
has served as Chairman, Director and Chief Executive Officer of the Company
since the Acquisition in 1996. Prior to joining Freedom Securities Holding
Corporation, Mr. Goldsmith served in various capacities at Prescott, Ball &
Turben in Cleveland, Ohio, including as Managing Partner and Chief Executive
Officer from 1978 to 1982 and as President and Chief Executive Officer from 1982
to 1988. Mr. Goldsmith worked in the institutional sales department of L.F.
Rothschild from 1963 to 1971.
 
     WILLIAM C. DENNIS, JR. Mr. Dennis was elected Executive Vice President and
Chief Financial Officer of the Company in May 1997. Prior to joining the
Company, he was a Director and Chief Financial Officer of Rodman & Renshaw
Capital Group, Inc., a financial services firm, from 1996 to 1997. Previously,
Mr. Dennis was a managing director of MIS, Inc., a database management company,
and prior to joining MIS, Inc. he was Chief Financial Officer of the Capital
Markets Sector of Merrill Lynch & Co., Inc. Earlier in his career, Mr. Dennis
was a senior financial executive of Exxon Corporation.
 
     JOHN F. LUIKART. Mr. Luikart joined Sutro in 1988 as Executive Vice
President and was responsible for directing all of the firm's capital markets
activities. Mr. Luikart became President of Sutro in 1990. Mr. Luikart was
subsequently elected to the Board of Directors of Freedom Securities Holding
Corporation and appointed Chief Executive Officer of Sutro in October 1995. Mr.
Luikart became Chairman of Sutro in October 1998 and has served as a Director of
Freedom since the Acquisition in November 1996. Prior to joining Sutro, Mr.
Luikart served as General Partner and Executive Vice President at Prescott, Ball
& Turben in Cleveland, Ohio. Mr. Luikart is a former Chairman of the NASD
District Business Conduct Committee and is a former member of the New York Stock
Exchange Regional Firm Advisory Committee.
 
     KEVIN J. MCKAY. Mr. McKay joined Freedom Securities Holding Corporation in
1994 and has served as General Counsel and Secretary of Freedom Securities
Holding Corporation since that time. Mr. McKay has served as General Counsel and
Secretary of the Company since the Acquisition in 1996. Prior to joining Freedom
Securities Holding Corporation, Mr. McKay was General Counsel of Prudential
Securities Incorporated from 1990 to 1994. Mr. McKay has over 20 years of
experience in the legal and compliance field of the securities industry. Mr.
McKay is a past President of the Compliance & Legal Division of the Securities
Industry Association.
 
     DAVID P. PROKUPEK. Mr. Prokupek was elected to the Freedom Board of
Directors in May 1998, following the acquisition of Cleary Gull. He joined
Cleary Gull as Managing Director of the Investment Banking Department in 1992,
was elected a director in 1994, and was named Chief Executive Officer in 1996.
Prior to joining Cleary Gull, Mr. Prokupek was a Managing Director of American
Asset Management, a New York-based investment counselor and merchant bank, and
from 1987 to 1989, he was a member of Bankers Trust Company's Merchant Banking
Group.
 
     ROBERT H. YEVICH. Mr. Yevich joined Tucker Anthony in 1985 and became
National Sales Manager in 1988. Mr. Yevich was elected to the Board of Directors
of Freedom Securities Holding Corporation and promoted to President of Tucker
Anthony in 1995. Mr. Yevich has served as Director of Freedom since the
Acquisition in November 1996. Mr. Yevich has 25 years of varied experience in
the retail brokerage business as a stockbroker, branch manager and research
associate. Prior to joining Tucker Anthony, Mr. Yevich served as branch manager
with Paine Webber.
 
                                       12
<PAGE>   14
 
                                    PART II
 
ITEM 5.  MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
 
  (a) Market Information
 
     The Company's Common Stock is listed on the NYSE under the symbol "FSI."
The high and low sales prices per share of the Company's Common Stock by quarter
since the Offering in April 1998 were as follows:
 
<TABLE>
<CAPTION>
QUARTER                                                     HIGH      LOW
-------                                                     ----      ---
<S>                                                         <C>       <C>
Second 1998...............................................  $23 1/8   $17 3/16
Third 1998................................................   21 1/2    11 11/16
Fourth 1998...............................................   19         9 3/8
</TABLE>
 
     As of March 1, 1999, the closing sales price per share of the Company's
Common Stock was $16.00.
 
  (b) Holders
 
     As of March 1, 1999 there were approximately 865 record holders of the
Company's Common Stock, according to the records maintained by the Company's
transfer agent. As of March 1, 1999, the Company estimates that there were over
6,900 beneficial owners of the Company's Common Stock.
 
  (c) Dividends
 
     Since the Offering of the Company's Common Stock, the Company has paid a
cash dividend of $0.04 per share on August 25, 1998, November 25, 1998 and March
8, 1999 and currently intends to declare similar quarterly dividends in the
future. The Company did not pay dividends from the time of the Acquisition until
the Offering. The timing and amount of future dividends will be determined by
the Company's Board of Directors and will depend, among other factors, upon the
Company's earnings, financial condition and cash requirements at the time such
payment is considered. Furthermore, the net capital rules of the various
regulatory bodies impose limitations on the payment of dividends by the Company.
 
                                       13
<PAGE>   15
 
ITEM 6.  SELECTED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                                   PREDECESSOR COMPANY
                                                         COMBINED(a)                    -----------------------------------------
                                   YEARS ENDED           ------------     ONE MONTH     ELEVEN MONTHS          YEARS ENDED
                                   DECEMBER 31            YEAR ENDED        ENDED           ENDED              DECEMBER 31
                             ------------------------    DECEMBER 31     DECEMBER 31     NOVEMBER 29     ------------------------
                                1998          1997           1996           1996            1996            1995          1994
                             ----------    ----------    -----------     -----------    -------------    ----------    ----------
<S>                          <C>           <C>           <C>             <C>            <C>              <C>           <C>
FINANCIAL RESULTS
Net revenues...............  $  440,376    $  376,814(b)  $  350,239(b)  $   28,836(b)   $  321,403(b)   $  332,762(b) $  297,066(b)
Income before income
  taxes....................  $   44,594    $   32,435     $   21,807     $    1,420      $   20,387      $   22,284    $   10,876
Net income before
  extraordinary item.......  $   26,411    $   18,698     $   12,283     $      740      $   11,543      $   13,064    $    6,415
Net income after
  extraordinary item (c)...  $   25,135    $   18,698     $   12,283     $      740      $   11,543      $   13,064    $    6,415
PER COMMON SHARE
Basic earnings before
  extraordinary item.......  $     1.41(d) $     1.31             --     $     0.05              --              --            --
Basic earnings after
  extraordinary item (c)...  $     1.34(d) $     1.31             --     $     0.05              --              --            --
Diluted earnings before
  extraordinary item.......  $     1.34(d) $     1.27             --     $     0.05              --              --            --
Diluted earnings after
  extraordinary item (c)...  $     1.28(d) $     1.27             --     $     0.05              --              --            --
Cash dividends declared....  $     0.08            --             --             --              --              --            --
Book value at end of
  period...................  $    11.13    $     6.96     $     5.55             --              --              --            --
FINANCIAL CONDITION
Total assets...............  $  606,250    $  727,587     $  516,952             --              --      $1,214,003    $1,037,920
Long-term borrowings.......  $   16,709    $  101,446     $  110,819             --              --              --            --
Stockholders' equity.......  $  223,390    $  102,326     $   79,468             --              --      $  152,781    $  145,468
Common shares outstanding
  at end of period.........      20,079        14,704         14,313             --              --               1             1
OTHER FINANCIAL DATA
EBITDA(e)..................  $   61,393    $   50,742     $   37,424     $    3,095      $   34,329      $   34,246    $   21,730
Pre-tax margin.............        10.1%          8.6%           6.2%            --              --             6.7%          3.7%
Return on average equity
  (f)......................        16.2%         20.6%          10.6%            --              --             8.8%          4.5%
Assets in retail brokerage
  accounts at end of period
  (in billions)............  $     31.7    $     27.5     $     23.4             --              --      $     20.8    $     16.8
</TABLE>
 
---------------
(a) Based on the consolidated results of the Company for the one month ended
    December 31,1996 combined with the consolidated results of the Predecessor
    Company for the eleven months ended November 29, 1996.
 
(b) Amounts have been reclassified to conform with 1998 financial statement
    presentation.
 
(c) Extraordinary item of $1.2 million after tax represents the write-off of
    capitalized debt costs as a result of the retirement of $77.5 million in
    debt in conjunction with the Company's April 2, 1998 initial public
    offering.
 
(d) Earnings per share in 1998 as compared to prior periods reflect a
    significant increase in shares outstanding due to the Company's 1998 public
    offering.
 
(e) EBITDA represents earnings before extraordinary item, acquisition interest
    expense, taxes, depreciation and amortization. EBITDA is a supplemental
    measure of operating results or cash flow from operations and is a widely
    accepted financial indicator of a company's liquidity. It is not an
    alternative measure of operating results or cash flow from operations as
    determined in accordance with generally accepted accounting principles.
 
(f) Return on average equity for 1998 is before extraordinary item.
 
                                       14
<PAGE>   16
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
BUSINESS ENVIRONMENT
 
     The Company's retail securities brokerage activities, as well as its
investment banking, asset management, institutional sales and trading and equity
research services, are highly competitive and subject to various risks including
volatile trading markets and fluctuations in the volume of market activity.
These markets are affected by general economic and market conditions, including
fluctuations in interest rates, volume and price levels of securities and flows
of investor funds into and out of mutual funds and pension plans and by factors
that apply to particular industries such as technological advances and changes
in the regulatory environment. Declining interest rates and an improving
economic environment contributed to a significant increase in activity in the
equity markets in the United States throughout 1996 and 1997. The United States
economy remained strong during 1998, with stable interest rates and low
inflation. The financial markets experienced periods of heavy volatility during
August and September 1998, resulting in a difficult operating environment for
the third quarter, particularly in trading and investment banking activities.
The financial markets stabilized somewhat in the fourth quarter of 1998. The
Company's financial results have been and may continue to be subject to
fluctuations due to these and other factors. Consequently, the results of
operations for a particular period may not be indicative of results to be
expected for other periods.
 
COMPANY DEVELOPMENTS
 
     Management believes that certain factors positively impacted operating
results in 1998. First, except for much of the second half of 1998, favorable
economic conditions generally resulted in strong securities markets. Second,
changing from private to public ownership aided in the retention and recruiting
of quality employees, especially in the Company's retail and equity capital
markets businesses. Third, the acquisition of Cleary Gull provided the Company
with a strong presence in the midwestern United States and significantly
enhanced the Company's investment banking, equity research and institutional
trading businesses.
 
  Initial Public Offering
 
     On April 2, 1998, the Company completed its initial public offering of 7.4
million shares plus an over-allotment of 1.1 million shares, including 4.2
million shares of Common Stock sold by the Company. The Offering raised
approximately $75.7 million for the Company, after deducting underwriting
discounts, commissions and expenses. The Company used the proceeds and available
cash to repay $77.5 million of debt.
 
  Cleary Gull Acquisition
 
     On May 1, 1998, the Company completed its acquisition of Cleary Gull, a
privately held investment banking, institutional brokerage and investment
advisory firm headquartered in Milwaukee, Wisconsin. Cleary Gull was established
in 1987 as a private investment bank focusing on the equity capital markets
through institutional research, sales and trading, and investment banking
services. Cleary Gull's research analysts cover such areas as distribution and
logistics, healthcare, business services, technology and growth companies in the
upper midwestern United States. Cleary Gull's equity capital markets activities
include a national institutional sales force and over-the-counter and listed
trading services. Cleary Gull's investment banking activities are focused
primarily on merger and acquisition advisory services and financing assignments
in both public and private equity and debt markets. Cleary Gull recently
established its Investment Management Services group to provide retail brokerage
and investment management services to institutional accounts and high net worth
individuals. The acquisition was accounted for by the Company using the purchase
method of accounting and its consolidated financial statements include the
results of Cleary Gull's operations from the date of acquisition.
 
                                       15
<PAGE>   17
 
COMPONENTS OF REVENUES AND EXPENSES
 
     REVENUES. Commission revenues include retail and institutional commissions
received by the Company as an agent in securities transactions, including all
exchange listed, over-the-counter agency, mutual fund, insurance and annuity
transactions. Principal transactions revenues include principal sales credits
and dividends as well as gains and losses from the trading of securities by the
Company as principal. Investment banking revenues include selling concessions,
underwriting fees and management fees received from the underwriting of
corporate or municipal securities as well as fees earned from providing merger
and acquisition and other financial advisory services. Asset management revenues
include fees generated from providing investment advisory, portfolio management
and custodial services to clients, as well as managed account fees and 12b-1
distribution fees. Other revenues primarily consist of retirement plan revenue
and third party correspondent clearing fees. Interest income primarily consists
of interest earned on margin loans made to customers, securities purchased under
agreements to resell and fixed income securities held in the Company's trading
accounts. Net revenues equal total revenues less interest expense. Interest
expense includes interest incurred under its Wexford financing arrangement and
on bank borrowings, securities sold under agreements to repurchase, fixed asset
financing and cash balances in customer accounts.
 
     EXPENSES. Compensation and benefits expense includes sales, trading and
incentive compensation, which are primarily variable based on revenue production
and/or business unit profit contribution, and salaries, payroll taxes and
employee benefits which are relatively fixed in nature. Incentive compensation,
including bonuses for eligible employees, is accrued proratably throughout the
year based on actual or estimated annual amounts. Brokerage and clearance
expense includes the cost of securities clearance, floor brokerage and exchange
fees. Communications expense includes service charges for telecommunications,
news and market data services. Occupancy and equipment expense includes rent and
operating expenses for facilities, expenditures for repairs and maintenance, and
depreciation and amortization of furniture, fixtures and leasehold improvements.
Promotional expense includes travel, entertainment and advertising. Other
expenses include general and administrative expenses, including professional
services, litigation expenses, goodwill amortization, data processing and other
miscellaneous expenses. Acquisition interest expense represents the interest
incurred under the previous revolving credit agreement, the balance of which was
repaid with proceeds from the Company's Offering in April 1998.
 
                                       16
<PAGE>   18
 
RESULTS OF OPERATIONS
 
     The following table sets forth year-to-year increases (decreases) in the
major revenue and expense categories (in thousands):
 
<TABLE>
<CAPTION>
                                                                                       1998                  1997
                                                 TWELVE MONTHS ENDED               COMPARED TO           COMPARED TO
                                                     DECEMBER 31,                      1997                  1996
                                          ----------------------------------    ------------------    ------------------
                                            1998      1997(a)     1996(a)(b)    AMOUNT     PERCENT    AMOUNT     PERCENT
                                            ----      -------     ----------    ------     -------    ------     -------
<S>                                       <C>         <C>         <C>           <C>        <C>        <C>        <C>
Revenues:
    Commissions.........................  $178,959    $157,193     $145,241     $21,766       14%     $11,952        8%
    Principal transactions..............    98,287      97,958      103,099         329        0       (5,141)      (5)
    Investment banking..................    82,255      57,683       39,210      24,572       43       18,473       47
    Asset management....................    47,294      34,376       32,803      12,918       38        1,573        5
    Other...............................     8,569       7,976        8,322         593        7         (346)      (4)
                                          --------    --------     --------     -------               -------
        Total operating revenues........   415,364     355,186      328,675      60,178       17       26,511        8
    Interest income.....................    50,848      44,056       49,847       6,792       15       (5,791)     (12)
                                          --------    --------     --------     -------               -------
        Total revenues..................   466,212     399,242      378,522      66,970       17       20,720        5
    Interest expense....................    25,836      22,428       28,283       3,408       15       (5,855)     (21)
                                          --------    --------     --------     -------               -------
        Net revenues....................   440,376     376,814      350,239      63,562       17       26,575        8
Non-interest expenses:
    Compensation and benefits...........   286,072     245,159      228,046      40,913       17       17,113        8
    Occupancy and equipment.............    23,557      21,431       30,651       2,126       10       (9,220)     (30)
    Communications......................    19,181      17,105       17,912       2,076       12         (807)      (5)
    Brokerage and clearance.............    13,170      11,739       11,894       1,431       12         (155)      (1)
    Promotional.........................    14,115      10,452        9,974       3,663       35          478        5
    Other...............................    38,223      32,441       29,388       5,782       18        3,053       10
                                          --------    --------     --------     -------               -------
        Total non-interest expenses.....   394,318     338,327      327,865      55,991       17       10,462        3
Acquisition interest expense............     1,464       6,052          567      (4,588)     (76)       5,485       (c)
                                          --------    --------     --------     -------               -------
Income before income taxes..............    44,594      32,435       21,807      12,159       37       10,628       49
Income tax expense......................    18,183      13,737        9,524       4,446       32        4,213       44
                                          --------    --------     --------     -------               -------
Net income before extraordinary item....    26,411      18,698       12,283       7,713       41        6,415       52
    Extraordinary item (net of
      tax)(d)...........................    (1,276)         --           --     (1,276)       (c)          --       --
                                          --------    --------     --------     -------               -------
Net income after extraordinary item.....  $ 25,135    $ 18,698     $ 12,283     $ 6,437       34%     $ 6,415       52%
                                          ========    ========     ========     =======               =======
</TABLE>
 
---------------
(a) Certain amounts have been reclassified from those previously reported to
    conform with 1998 financial statement presentation.
 
(b) Based on the consolidated results of the Company for the one month ended
    December 31,1996 combined with the consolidated results of the Predecessor
    Company for the eleven months ended November 29, 1996.
 
(c) Not meaningful.
 
(d) Extraordinary item is related to the write-off of capitalized debt costs as
    a result of the retirement of $77.5 million in debt in conjunction with the
    Company's April 2, 1998 initial public offering.
 
                                       17
<PAGE>   19
 
  1998 Compared to 1997
 
     The Company achieved record operating results in 1998 compared to 1997. Net
revenues increased $63.6 million or 17% to $440.4 million in 1998 from $376.8
million in 1997 and, with the exception of principal transactions, reflected
increases in generally all revenue categories. Net income before extraordinary
item was $26.4 million, up $7.7 million or 41% for 1998 versus $18.7 million in
1997.
 
     Earnings per common share (diluted) before extraordinary item were $1.34 in
1998, compared to $1.27 in 1997. Earnings per common share in 1998 were
significantly impacted by the increase in the number of shares outstanding
following the Company's Offering. Earnings per share (diluted) on a pro forma
basis, adjusted to reflect the public offering, repayment of debt and the Cleary
Gull acquisition as if they had occurred at the beginning of 1997, would result
in a year over year improvement in pro forma earnings per share of $0.22 versus
the $0.07 improvement actually reported.
 
     Total operating revenues increased $60.2 million or 17% to $415.4 million
in 1998 from $355.2 million in 1997. During 1998 and 1997, Tucker Anthony
contributed 56% and 59%, respectively, of the Company's total operating
revenues; Sutro contributed 31% and 35%, respectively; and Freedom Capital
contributed 6% in each year. Cleary Gull contributed 6% during 1998.
 
     Commission revenues increased $21.8 million or 14% to $179.0 million in
1998 from $157.2 million in 1997, due to higher institutional sales as well as
increased volume in the Company's retail businesses, resulting from increased
average production per retail investment executive, a greater number of
investment executives and penetration into new markets. The Company opened three
new retail branches in 1998 and hired 105 new investment executives.
 
     Principal transactions revenues of $98.3 million in 1998 were essentially
flat when compared to $98.0 million in 1997. Although fixed income related
revenues rose 14% from 1997, this increase was offset by lower over-the-counter
and arbitrage trading revenues. Arbitrage trading activities were adversely
impacted by turbulent financial market conditions in the 1998 third quarter, but
rebounded during the fourth quarter and were profitable for the year.
 
     Investment banking revenues increased $24.6 million or 43% to $82.3 million
in 1998 from $57.7 million in 1997. The improvement in investment banking
revenues resulted from higher public offering revenues during the first six
months of the year, continued growth in merger and acquisition and advisory
activities, and the inclusion of Cleary Gull in 1998.
 
     Asset management revenues grew $12.9 million or 38% to $47.3 million in
1998 from $34.4 million in 1997, and now represent 11% of the Company's total
net revenues. This revenue increase reflected the overall growth in assets under
management, which grew 38% to over $9.0 billion at year end 1998 and resulted
from both new money added to the funds as well as asset appreciation arising
from equity market performance.
 
     Interest income increased $6.8 million or 15% to $50.8 million in 1998 from
$44.0 million in 1997, due primarily to the combination of higher interest
income on higher average customer margin balances and greater stock borrow
activity. Interest expense, excluding those expenses associated with financing
the Acquisition, increased $3.4 million or 15% to $25.8 million for 1998 from
$22.4 million in 1997, mainly reflecting the financing of higher average firm
inventory and customer balances. Acquisition interest expense decreased $4.6
million during 1998 reflecting the retirement of debt in conjunction with the
Company's public offering.
 
     Compensation and benefits expense increased $40.9 million or 17% to $286.1
million in 1998 from $245.2 million in 1997, primarily due to increased
incentive and production-related compensation attributable to higher revenues
and the inclusion of Cleary Gull in 1998. Compensation and benefits as a
percentage of net revenues were 65% for both 1998 and 1997.
 
     Non-compensation related operating expenses increased an aggregate of $15.0
million or 16% to $108.2 million in 1998 from $93.2 million in 1997. The
increase in 1998 included approximately $6.7 million of operating expenses for
Cleary Gull, which was acquired in 1998. Non-compensation related operating
expenses as a percentage of net revenues were 25% in both 1998 and 1997.
Communication expenses increased
                                       18
<PAGE>   20
 
$2.1 million or 12% (including $0.9 million from Cleary Gull) to $19.2 million
in 1998 from $17.1 million in 1997 primarily due to upgrades to the Company's
market data technology. Promotional expenses increased $3.7 million or 35%
(including $1.2 million from Cleary Gull) to $14.1 million in 1998 from $10.4
million in 1997 due to increased spending on research conferences, advertising,
business development and travel. Other expenses, which include professional
fees, data processing, printing, postage and license/registration fees,
increased $5.8 million or 18% (including $2.7 million from Cleary Gull) to $38.2
million in 1998 from $32.4 million in 1997.
 
     The Company's income tax provisions for 1998 and 1997 were $18.2 million
and $13.7 million, respectively. The effective tax rate was 41% for 1998, down
from 42% in 1997 reflecting an increase in income not subject to tax.
 
  1997 Compared to 1996
 
     The Company experienced strong operating results in 1997 compared to 1996.
Revenues increased in all of the Company's core businesses, with the exception
of principal transaction revenues, and expenses declined as a percentage of net
revenues. Net income increased $6.4 million or 52% to $18.7 million in 1997 from
net income of $12.3 million in 1996, even after deducting after-tax expenses of
$5.9 million in 1997 related to the Acquisition (primarily amortization of
goodwill and interest and other expenses related to the former credit facility).
 
     Total operating revenues increased $26.5 million or 8% to $355.2 million in
1997 from $328.7 million in 1996. During 1997 and 1996, Tucker Anthony
contributed 59% and 61%, respectively, of the Company's total operating revenues
while Sutro contributed 35% and 32%, respectively, and Freedom Capital
contributed 6% and 7%, respectively. Net revenues, including the effect of
interest income and interest expense, other than the Acquisition interest
expense, increased $26.6 million or 8% to $376.8 million in 1997 versus $350.2
million in 1996.
 
     Commission revenues increased $12.0 million or 8% to $157.2 million in 1997
from $145.2 million in 1996, due to increases in the Company's retail
businesses, reflecting the growth in listed share volume on all the major equity
exchanges, higher mutual fund commission revenue and increased average
production per retail investment executive.
 
     Principal transaction revenues declined $5.1 million or 5% to $98.0 million
in 1997 from $103.1 million in 1996, mainly due to the combined result of
management's decision to discontinue certain institutional fixed income business
resulting in a decline of $1.5 million, the $1.3 million net effect of a
decrease in convertible arbitrage trading profits as interest rates declined
during the period partially offset by improvement in risk arbitrage trading, and
a mortgage-backed securities trading loss of $2.6 million caused by a former
employee, partially offset by a $0.8 million improvement in the trading of
equities.
 
     Investment banking revenues increased $18.5 million or 47% to $57.7 million
in 1997 from $39.2 million in the prior year. The higher investment banking
revenues resulted from increased underwriting activity, similar to that
experienced in the securities industry generally, and from the Company's
refocused and increased emphasis on the public offering business at Tucker
Anthony and Sutro. Additionally, the Company generated an increase in private
placement, advisory and merger and acquisition fees of 17% over 1996.
 
     Asset management revenues increased $1.6 million or 5% to $34.4 million in
1997 from $32.8 million in 1996. This revenue increase arose primarily in the
institutional area where assets grew 14% to $1.7 billion and related revenues
increased 21% or $1.0 million in 1997, reflecting the full year effect of new
accounts at year-end 1996 and asset appreciation arising from equity market
performance which produced higher fee income. Total assets under management grew
to $6.5 billion at year end 1997 from $6.1 billion at year end 1996.
 
     Interest income decreased $5.8 million or 12% to $44.0 million in 1997 from
$49.8 million in 1996, due to a $10.1 million decline in interest income mainly
on lower average government bond inventories partially offset by $4.4 million of
higher interest income on customer balances. Interest expense, excluding those
expenses associated with financing the Acquisition, decreased $5.9 million or
21% to $22.4 million in 1997 from $28.3 million in 1996, reflecting lower
average inventory balances. Acquisition interest expense increased
                                       19
<PAGE>   21
 
$5.5 million during 1997 reflecting the full year effect of borrowings under the
previous revolving credit agreement made at the time of the Acquisition in
November 1996.
 
     Compensation and benefits expense increased $17.1 million or 8% to $245.2
million in 1997 from $228.1 million in 1996, primarily due to increased
incentive and production-related compensation, offset by lower fixed expenses
resulting from back office support personnel reductions associated with the
outsourcing of the Company's clearing function in 1996 and substantial
organizational changes in the fixed income area. Compensation and benefits as a
percentage of net revenues remained virtually unchanged at 65% in 1997 as
compared to 1996. During 1997, the Company incurred $1.4 million of non-cash
compensation expense resulting from the issuance of Common Stock and stock
options to its employees.
 
     Non-compensation related operating expenses decreased an aggregate of $6.6
million or 7% to $93.2 million for 1997 from $99.8 million in 1996, primarily
due to the realization of benefits from outsourcing and other cost efficiencies
initiated by management. Non-compensation related expenses as a percentage of
net revenues declined to 25% in 1997 from 29% in 1996. Specifically,
communications expense decreased $0.8 million, or 5%, and occupancy and
equipment expense decreased $9.2 million, or 30% (including a one-time charge of
$4.5 million in 1996 related to entering into the Wexford clearing arrangement).
These decreases were partially offset by an increase in promotional expense of
$0.5 million or 5% and an increase in other expenses which totaled $32.4 million
in 1997 (including $1.9 million in goodwill amortization relating to the
Acquisition), as compared to 1996 when other expenses totaled $29.4 million
(including a one-time credit of $6.3 million due to an insurance recovery
associated with litigation expenses incurred during a prior period). Without
giving effect to such amortization expense and insurance recovery, other
expenses in 1997 decreased $5.0 million or 14% compared to 1996, primarily as a
result of the Wexford clearing arrangement.
 
     The Company's income tax provisions in 1997 and 1996 were $13.7 million and
$9.5 million, respectively, which represented a 42% effective tax rate in 1997
and a 44% effective tax rate in 1996. The lower effective tax rate in 1997 was
due mainly to an increase in non-taxable income.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company receives dividends, interest on loans and other payments from
its subsidiaries, which are the Company's primary sources of funds to pay
expenses, service debt and pay dividends. Distributions and interest payments to
the Company from its registered broker-dealer subsidiaries, the Company's
primary sources of liquidity, are restricted as to amounts which may be paid by
applicable law and regulations. The Net Capital Rules are the primary regulatory
restrictions regarding capital resources. The Company's rights to participate in
the assets of any subsidiary are also subject to prior claims of the
subsidiary's creditors, including customers of the broker-dealer subsidiaries.
 
     Borrowings under the previous revolving credit agreement were repaid in
full by the Company with the net proceeds of the Offering and available cash,
leaving the Company with $16.7 million of indebtedness at year end 1998 under a
fixed asset credit facility (the "Fixed Asset Facility") secured by the
Company's fixed assets. In August 1998, the Company entered into a new unsecured
revolving credit agreement (the "Credit Agreement") whereby participating banks
have made commitments totaling $50 million. Under the Credit Agreement, the
Company has the option to borrow at the federal funds rate or the eurodollar
rate (each plus applicable margin as defined, ranging from 0.50% to 0.75% based
on a calculated leverage ratio) or the agent's base rate. Borrowings under the
Credit Agreement, which matures on August 21, 2001, may be prepaid without
penalty. Additionally, the Company must pay a quarterly commitment fee for the
new credit facility calculated at 0.15% per year on the unused facility. At
December 31, 1998, the Company did not have any borrowings under the Credit
Agreement.
 
     The assets of the Company's primary operating subsidiaries are highly
liquid with the majority of such assets consisting of securities inventories and
collateralized receivables, both of which fluctuate depending on the levels of
customer business. Collateralized receivables consist mainly of securities
purchased under agreements to resell, which are secured by U.S. government and
agency securities. A relatively small percentage of total assets is fixed or
held for a period of longer than one year.
 
                                       20
<PAGE>   22
 
     The majority of the subsidiaries' assets are financed through Wexford, by
securities sold under repurchase agreements and by securities sold, not yet
purchased. The Company's principal source of short-term financing is based on
its clearing arrangement with Wexford under which the Company can borrow on an
uncommitted collateralized basis against its proprietary inventory positions.
This financing generally is obtained from Wexford at rates based upon prevailing
market conditions. The Company monitors overall liquidity by tracking the extent
to which unencumbered marketable assets exceed short-term unsecured borrowings.
 
     Repurchase agreements are used primarily for customer accommodation
purposes and to finance the Company's inventory positions in U.S. government and
agency securities. These positions provide products and liquidity for customers
and are not maintained for the Company's investment or market speculation. The
level of activity fluctuates depending on customer and inventory needs; however,
these fluctuations have not materially affected liquidity or capital resources.
The Company monitors the collateral position and counterparty risk on these
transactions daily.
 
     The subsidiaries' total assets and short-term liabilities and the
individual components thereof may vary significantly from period to period
because of changes relating to customer needs and economic and market
conditions. The Company's total assets at December 31, 1998 and December 31,
1997 were $606.3 million and $727.6 million, respectively.
 
     The Company's operating activities generate cash resulting from net income
earned during the period and fluctuations in its current assets and liabilities.
The most significant fluctuations have resulted from changes in the level of
customer activity and securities inventory changes resulting from proprietary
arbitrage trading strategies dictated by prevailing market conditions.
 
     The Acquisition was funded through proceeds from the sale of Common Stock
and borrowings under the previous revolving credit agreement. The acquisition of
Cleary Gull was funded through the issuance of shares of the Company's Common
Stock and with funds generated from operating activities.
 
     As noted above, the Company maintains, through two subsidiaries, the Fixed
Asset Facility with BancBoston Leasing Inc. which matures in 2001 and had an
outstanding balance at December 31, 1998 of $16.7 million. The Company has
historically financed capital expenditures through internal cash generation and
through the Fixed Asset Facility. For the years ended December 31, 1998 and
December 31, 1997, the Company had capital expenditures of approximately $5.1
million and $2.0 million, respectively, which were funded from operations. In
January 1999, the Company refinanced a portion of the Fixed Asset Facility and
secured additional financing for a $4.7 million upgrade of its computer system.
This new financing bears interest at 5.15% annually and is payable in equal
monthly installments through May 2003.
 
     In addition to normal operating requirements, capital is required to
satisfy financing and regulatory requirements on securities inventories and
investment banking commitments. The Company's overall capital needs are
continually reviewed to ensure that its capital base can appropriately support
the anticipated capital needs of the subsidiaries. Management believes that
existing capital funds provided from operations, the current credit arrangements
with Wexford and the unutilized Credit Agreement from participating banks will
be sufficient to finance the operating subsidiaries' ongoing businesses.
 
     In September 1998, the Board of Directors approved a stock repurchase
program that permits the Company's management to purchase at its discretion up
to five percent of its Common Stock outstanding or approximately one million
shares. The Company will fund the stock repurchases from internal sources or
through borrowings and will use the shares for issuance of stock under employee
stock option and stock purchase plans, or retain the shares as treasury stock.
As of December 31, 1998, the Company had repurchased 76,290 shares at an average
price of $15.36 per share. In January 1999, the Company purchased 494,748 shares
from SCP Private Equity Partners, L.P., one of the original equity investors in
the Company, at $15.56 per share. This purchase was not part of the stock
repurchase program and was funded from operations of the Company.
 
                                       21
<PAGE>   23
 
CASH FLOWS
 
     Cash and cash equivalents at December 31, 1998 and 1997 totaled $11.3
million and $12.9 million, respectively. For the year ended December 31, 1998,
funds generated from operating activities of $16.3 million, including net income
of $25.1 million, along with available cash and proceeds from the Company's
Offering were used primarily for purchases of fixed assets, repayment of debt
and to fund the acquisition of Cleary Gull.
 
     Net proceeds of approximately $75.7 million from the Offering on April 2,
1998 and available cash were used to repay the $77.5 million bank debt
outstanding under the former revolving credit agreement.
 
RISK MANAGEMENT
 
     The Company's primary risk exposures are market risk (particularly equity
price and interest rate risk) and credit risk. Market risk refers to the risk
that a change in the level of equity prices, interest rates or other factors
could result in trading losses. Credit risk refers to the risk that a
counterparty to a transaction might fail to perform under its contractual
commitment resulting in the Company incurring losses. Tucker Anthony's, Sutro's
and Cleary Gull's risk management focuses on the trading of securities,
extension of credit to counterparties and investment banking activities, as well
as the extension of credit to retail and institutional customers. Tucker
Anthony, Sutro and Cleary Gull monitor their market and credit risk daily
through a number of control procedures designed to identify and evaluate the
various risks to which they are exposed.
 
  Market Risk
 
     Tucker Anthony, Sutro and Cleary Gull may act as a principal to facilitate
customer-related transactions in financial instruments which expose the firm to
market risks. Tucker Anthony, Sutro and Cleary Gull make markets in certain
equity and debt securities and Tucker Anthony trades for its own account in
arbitrage-related trading activities. Whether acting as principal to facilitate
customer transactions or trading for their own account, Tucker Anthony, Sutro
and Cleary Gull monitor market risk very closely.
 
     Managing market risk exposure includes: limiting firm commitments by
position levels both long and short for every product that is traded; limiting
the type of trades that can occur in each inventory account; and tactically
employing certain hedging techniques that reduce the level of risk taken by
Tucker Anthony, Sutro and Cleary Gull. Management believes that the risk
management practices aid in managing the Company's market exposure.
 
     Tucker Anthony and Sutro manage daily risk exposure in their firm inventory
accounts by requiring various levels of management review of these accounts. The
primary purpose of risk management is to participate in the establishment of
position limits, as well as to monitor both the buy and sell activity in the
firm's trading accounts. Trading activities of Tucker Anthony, Sutro and Cleary
Gull result in the creation of inventory positions. Position and exposure
reports indicating both long and short positions are prepared, distributed and
reviewed each day. These reports enable Tucker Anthony and Sutro to control
inventory levels, monitor daily trading results by product, as well as review
inventory aging, pricing and concentration. Cleary Gull monitors trading
activity on a monthly basis, unless the overall position limit is exceeded.
 
  Credit Risk
 
     Tucker Anthony, Sutro and Cleary Gull deal with counterparties or other
broker-dealers in conducting business for their clients or for their own
account. Financing extended to counterparties is provided against collateral.
Risk management participates in the review of counterparties to establish
appropriate exposure levels on an account by account basis. Tucker Anthony,
Sutro and Cleary Gull manage daily credit exposure by monitoring the level of
collateral and creditworthiness of counterparties and their related trading
limits.
 
     Tucker Anthony and Sutro, through Wexford, extend credit to retail
customers. Amounts loaned are limited by the margin regulations of the Board of
Governors of the Federal Reserve System and other regulatory authorities and are
subject to credit review and daily monitoring by Wexford, Tucker Anthony and
Sutro.
                                       22
<PAGE>   24
 
     Risks associated with investment banking activities are controlled through
capital commitment committees within Tucker Anthony and Sutro. These commitment
committees review every significant proposed investment banking transaction
prior to its acceptance by Tucker Anthony or Sutro. These respective capital
committees review major proposed transactions in order to determine the effect
of such transactions on regulatory capital prior to their approval. Only after
acceptance by the committee within each firm will that subsidiary's commitment
to underwrite a specific security be extended to the investment banking client.
Cleary Gull's commitment committee performs the dual function of analyzing
proposed transactions as well as assessing the impact on regulatory capital.
 
  Value at Risk
 
     Under Securities and Exchange Commission rules, the Company is required to
disclose information about its exposure to market risk. As permitted by SEC
rules, the Company used a statistical technique known as Value-at-Risk ("VaR")
to estimate the potential daily earnings effect of adverse changes in fair value
of its trading positions. VaR incorporates numerous variables that could impact
the fair value of the Company's trading portfolio, including equity and interest
rates, associated volatilities, as well as the correlation that exists among
these variables.
 
     The Company calculated VaR using a variance/covariance model with a
two-tailed confidence level of 95% over a one-day holding period. That is, the
Company's VaR represents a potential one-day loss in value that would be
exceeded less than 2.5% of the time if the portfolio were unchanged.
 
     Among the benefits, a VaR model permits the estimation of a portfolio's
aggregate market risk exposure; incorporates a range of varied market risks in
the calculation; reflects risk reduction due to portfolio diversification; and
is comprehensive yet relatively easy to interpret. However, VaR measures should
be interpreted in light of the methodology's limitations, which include the fact
that past changes in market risk will not always accurately predict future
changes in a portfolio's value; the model does not include all of a trading
portfolio's market risk factors; and any published VaR results which reflect a
point in time analysis (i.e. December 31, 1998 positions) do not fully capture
the market risk of positions that may not be liquidated or hedged within one
day. The Company is aware of these and other limitations and therefore views VaR
as only one component in its risk management review process.
 
     The table below presents the Company's VaR results for each of the
Company's primary risk exposures as well as on an aggregate basis at December
31, 1998 and incorporates substantially all financial instruments generating
market risk. Since VaR is based on historical data and changes in market risk
factor returns, VaR should not be viewed as predictive of the Company's future
financial performance or its ability to manage and monitor risk. Also, there can
be no assurance that the Company's actual losses on a particular day will not
exceed the VaR amounts indicated below (in thousands):
 
<TABLE>
<CAPTION>
                                                          95%/ONE-DAY VaR
                  PRIMARY MARKET RISK                       AT 12/31/98
                  -------------------                     ---------------
<S>                                                       <C>
Interest rate VaR.......................................      $  474
Equity VaR..............................................         820
                                                              ------
Sub-total...............................................       1,294
Less: Diversification benefit*..........................        (617)
                                                              ------
Total...................................................      $  677
                                                              ======
</TABLE>
 
---------------
* The diversification benefit represents the elimination of market risks which
  are present and are offsetting in both the interest rate VaR and the equity
  VaR.
 
YEAR 2000 COMPLIANCE
 
     The securities industry is, to a significant extent, technologically driven
and dependent. In addition to internally utilized technological applications,
the Company's businesses are materially dependent upon the performance of
exchanges, market centers, counterparties, customers and vendors (collectively
"the Company's material third parties") who, in turn, may be heavily reliant on
technological applications. In sum, the
 
                                       23
<PAGE>   25
 
securities industry is pervasively interdependent with each "link of the chain"
strengthened or weakened by the quality and performance of its attendant
information and embedded technology.
 
     The Company is aware that the Year 2000 provides potential problems with
the programming code in existing computer systems. The "Year 2000 problem" is
extensive and complex as virtually every computer operation will be affected to
some degree by the change of the two digit year value to 00. The issue is
whether computer systems will properly recognize date-sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or fail.
 
     The failure or faulty performance of computer systems could potentially
have a far ranging impact on the Company's businesses such as a diminution in
its ability to (a) ascertain information vital to strategic decision making by
both the Company and its customers; (b) perform interest rate and pricing
calculations; (c) execute and settle proprietary and customer transactions; (d)
undertake regulatory surveillance and risk management; (e) maintain accurate
books and records and provide timely reports; (f) maintain appropriate internal
financial operations and accounting; and (g) access credit facilities for both
the Company and its customers. Accordingly it is necessary for the Company, to
the extent reasonably practicable, to identify the internal computer systems and
software which are likely to have a critical impact on its operations, make an
assessment of its Year 2000 readiness and modify or replace information and
embedded technology as needed. In addition, the Company must make a Year 2000
readiness assessment of the Company's material third parties.
 
     In the fourth quarter of 1995, the Company began to strategically assess
the need for renovation, replacement or retirement of all business applications.
This assessment was coincident with the conversion of the Company's principal
broker-dealer subsidiaries to clear securities transactions through Wexford, an
unaffiliated broker-dealer. During the first half of 1996, in connection with
the conversion to Wexford, a substantial portion of all application and vendor
code were modified to be Year 2000 compliant and these changes were tested and
verified in 1998 to be materially effective. The Company continues to test the
remainder of application and vendor code in order to ensure that it is Year 2000
compliant.
 
     Although Wexford is the contracting party for the provision of clearing
services, it in fact delivers those services through the operations of its
guaranteeing parent company, Prudential, a leading registered broker and dealer.
Consequently, it is the readiness of Prudential that is critical when assessing
the Year 2000 compliance of the clearing and operations capacity of the
Company's active broker-dealer subsidiaries. Prudential has been assessed, by
internal industry standards established by the Securities Industry Association,
to be within the top tier of Year 2000 readiness. In recent industry-wide
testing conducted by the Securities Industry Association, in which Prudential
took part, Prudential and other participants were able to input transactions and
send them to the appropriate markets for execution, confirmation and clearance
under simulated Year 2000 conditions.
 
     Additionally, the Company has assessed the state of readiness of all known
technologically oriented service vendors and believes, based on letters of
certification, that the vast majority of these vendors are Year 2000 compliant
with the remainder expected to be compliant by August 1999. This determination
does not mean that the vast majority of the Company's material third parties
pose no Year 2000 risk to the Company. First, the Company is relying in large
measure on these parties' assessments of their readiness. Second, there are
several vendors, which account for a substantial portion of the Company's
mission critical operations, which may be partially or largely, but not fully,
Year 2000 compliant. Finally, certain critical third parties, such as exchanges,
clearing houses, depositories and other service vendors have no direct
functional contact with the Company (as they operate directly with Wexford) but
may impact the Company's operations.
 
     At this juncture the Company's plan for the remainder of its Year 2000
remediation efforts include (1) identification, modification and testing of any
remaining non-compliant Year 2000 code; (2) identification, inventory,
assessment and, if necessary, modification of internal ad hoc systems or
applications that may be material to the Company's operations; (3) with the
exception of counterparties and customers, documentation of the assessment of
the readiness of the Company's material third parties; and (4) a timetable for
completion of the plan. The Company completed its written plan in March 1999 and
continues to assess and take measures to enhance its Year 2000 readiness. In
January 1999, the Company successfully tested the year
                                       24
<PAGE>   26
 
2000 readiness of its data network components. The Company's major vendor for
market data certified its system as Year 2000 compliant in February 1999. To
date, the Company's Year 2000 costs have been minimal. The Company believes
that, going forward, it will incur Year 2000 costs of approximately $500,000
which will be funded out of its working capital. Provided there is an absence of
unanticipated critical events, the Company does not expect Year 2000 costs to
have a material effect on its operating results, financial condition or cash
flows.
 
     As a contingency plan, the Company intends to have information systems
personnel on site, from December 31, 1999 through January 2, 2000, on a 24-hour
basis, to insure that any Year 2000 problems that arise, will be addressed and
corrected immediately. The Company has been informed by Prudential that it
intends to implement a similar contingency plan. The Company believes these
measures will be sufficient because of the following reasons: (1) the Company
has substantially modified, to the extent it can ascertain the problem, most
mission critical code and embedded technology; (2) the Company's vendors have
represented that they are either currently Year 2000 compliant or will become so
by the third quarter of 1999.
 
     However, it is the Company's position that there are no alternatives in the
event the exchanges or other market centers fail to perform, and the Company
believes it is highly likely that the factors which may prevent a particular
clearing firm from performing, would similarly affect all other clearing firms,
which would either preclude the availability of alternative clearing service
providers or overwhelm the resources of surviving alternative clearing service
providers. In other words, the Year 2000 presents a problem which is not likely
to be susceptible to remediation at a future date, if it is not fixed in
advance.
 
     The Company is cautiously optimistic about its current state of readiness
and its ability to make any further necessary modifications to internal systems
in time for the Year 2000. The Company also believes that its major third party
service provider, Prudential, has undertaken a systematic approach to the Year
2000 problem and will complete its plan which is designed to achieve a state of
readiness. However, there are factors outside the control of the Company which
make certainty impossible such as: (1) the inability to assess the readiness of
market counterparties and customers; (2) the inability to achieve assurance as
to any material third parties' representations of readiness; (3) the global
exposure of material third parties to Year 2000 problems outside the United
States which have a "knock-on" effect within the domestic securities markets and
operations; and (4) the limitations in anticipating all aspects of a problem
with which there is no prior historical experience. The presence of any or all
of these and other factors may well have a material adverse effect on the
Company's businesses, operating results, financial condition and cash flows.
 
ITEM 7a.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     The information required by this item is contained in "Item 7 Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the caption "Risk Management" and is incorporated by reference herein.
 
                                       25
<PAGE>   27
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS                     PAGE
-----------------------------------------                     ----
<S>                                                           <C>
Report of Independent Auditors..............................   27
Consolidated Statements of Financial Condition-- December
  31, 1998 and 1997.........................................   28
Consolidated Statements of Income-- For the years ended
  December 31, 1998 and 1997, one month ended December 31,
  1996 and eleven months ended November 29, 1996............   29
Consolidated Statements of Changes in Stockholders'
  Equity -- For the years ended December 31, 1998 and 1997,
  one month ended December 31, 1996 and eleven months ended
  November 29, 1996.........................................   30
Consolidated Statements of Cash Flows-- For the years ended
  December 31, 1998 and 1997, one month ended December 31,
  1996 and eleven months ended November 29, 1996............   31
Notes to Consolidated Financial Statements..................   32
</TABLE>
 
                                       26
<PAGE>   28
 
                         REPORT OF INDEPENDENT AUDITORS
 
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
FREEDOM SECURITIES CORPORATION:
 
     We have audited the accompanying consolidated statements of financial
condition of Freedom Securities Corporation ("Company") as of December 31, 1998
and 1997 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years ended December 31, 1998 and
1997 and the one month period ended December 31, 1996, and the accompanying
consolidated statements of income, changes in stockholders' equity and cash
flows of Freedom Securities Holding Corporation ("Predecessor Company") for the
period January 1, 1996 to November 29, 1996. These financial statements are the
responsibility of the management of the Company and the Predecessor Company. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly
in all material respects, the consolidated financial position of Freedom
Securities Corporation at December 31, 1998 and 1997 and the consolidated
results of its operations and its cash flows for the years ended December 31,
1998 and 1997 and the one month period ended December 31, 1996, and the
consolidated results of operations and cash flows of the Predecessor Company for
the period January 1, 1996 to November 29, 1996 in conformity with generally
accepted accounting principles.
 
                                            /s/ ERNST & YOUNG, LLP
 
New York, New York
January 25, 1999
 
                                       27
<PAGE>   29
 
                         FREEDOM SECURITIES CORPORATION
 
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                           DECEMBER 31, 1998 AND 1997
                   (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                1998          1997
                                                              --------      --------
<S>                                                           <C>           <C>
                            ASSETS
Cash and cash equivalents...................................  $ 11,292      $ 12,936
Receivables from brokers and dealers........................    88,674        74,314
Securities purchased under agreements to resell.............   119,861       113,335
Securities owned, at market.................................   252,478       423,522
Fixed assets, net of accumulated depreciation and
  amortization..............................................    19,479        20,464
Goodwill, net of accumulated amortization...................    34,875        24,861
Exchange memberships owned, at cost.........................     5,939         5,939
Deferred taxes..............................................    10,477         9,263
Other receivables...........................................    31,356        19,051
Other assets................................................    31,819        23,902
                                                              --------      --------
       Total assets.........................................  $606,250      $727,587
                                                              ========      ========
 
             LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Payables to brokers and dealers...........................  $ 85,306      $ 59,062
  Securities sold under agreements to repurchase............    28,582            --
  Securities sold, not yet purchased, at market.............   124,148       354,565
  Accrued compensation and benefits.........................    81,099        65,653
  Accounts payable and accrued expenses.....................    47,016        44,535
  Notes payable to banks....................................    16,709       101,446
                                                              --------      --------
       Total liabilities....................................   382,860       625,261
                                                              --------      --------
Stockholders' equity:
  Common stock (60,000,000 shares authorized, 20,155,395 and
     14,840,627 shares issued in 1998 and 1997,
     respectively, $.01 par value)..........................       201           147
  Additional paid-in capital................................   181,391        83,654
  Retained earnings.........................................    42,970        19,438
  Subscribed stock (136,532 shares in 1997).................        --          (913)
  Treasury stock (76,290 shares in 1998, at cost)...........    (1,172)           --
                                                              --------      --------
       Total stockholders' equity...........................   223,390       102,326
                                                              --------      --------
       Total liabilities and stockholders' equity...........  $606,250      $727,587
                                                              ========      ========
</TABLE>
 
                 See Notes to Consolidated Financial Statements

                                       28
<PAGE>   30
 
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
                       CONSOLIDATED STATEMENTS OF INCOME
                 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                          PREDECESSOR
                                                                                            COMPANY
                                                                                         -------------
                                                                          ONE MONTH      ELEVEN MONTHS
                                          YEAR ENDED      YEAR ENDED        ENDED            ENDED
                                         DECEMBER 31,    DECEMBER 31,    DECEMBER 31,    NOVEMBER 29,
                                             1998            1997            1996            1996
                                         ------------    ------------    ------------    -------------
<S>                                      <C>             <C>             <C>             <C>
Revenues
  Commissions..........................    $178,959        $157,193        $12,283         $132,958
  Principal transactions...............      98,287          97,958          8,226           94,873
  Investment banking...................      82,255          57,683          4,285           34,925
  Asset management.....................      47,294          34,376          2,202           30,601
  Other................................       8,569           7,976            308            8,014
                                           --------        --------        -------         --------
       Total operating revenues........     415,364         355,186         27,304          301,371
  Interest income......................      50,848          44,056          3,361           46,486
                                           --------        --------        -------         --------
       Total revenues..................     466,212         399,242         30,665          347,857
  Interest expense.....................      25,836          22,428          1,829           26,454
                                           --------        --------        -------         --------
       Net revenues....................     440,376         376,814         28,836          321,403
Non-interest expenses
  Compensation and benefits............     286,072         245,159         18,859          209,187
  Occupancy and equipment..............      23,557          21,431          1,997           28,654
  Communications.......................      19,181          17,105          1,316           16,596
  Brokerage and clearance..............      13,170          11,739          1,047           10,847
  Promotional..........................      14,115          10,452            818            9,156
  Other................................      38,223          32,441          2,812           26,576
                                           --------        --------        -------         --------
       Total non-interest expenses.....     394,318         338,327         26,849          301,016
Acquisition interest expense...........       1,464           6,052            567               --
                                           --------        --------        -------         --------
Income before income taxes.............      44,594          32,435          1,420           20,387
Income taxes...........................      18,183          13,737            680            8,844
                                           --------        --------        -------         --------
Net income before extraordinary item...      26,411          18,698            740           11,543
  Extraordinary item (net of tax of
     $922).............................      (1,276)             --             --               --
                                           --------        --------        -------         --------
Net income after extraordinary item....    $ 25,135        $ 18,698        $   740         $ 11,543
                                           ========        ========        =======         ========
Net income per share:
  Basic before extraordinary item......    $   1.41        $   1.31        $  0.05               --
                                           ========        ========        =======         ========
  Basic after extraordinary item.......    $   1.34        $   1.31        $  0.05               --
                                           ========        ========        =======         ========
  Diluted before extraordinary item....    $   1.34        $   1.27        $  0.05               --
                                           ========        ========        =======         ========
  Diluted after extraordinary item.....    $   1.28        $   1.27        $  0.05               --
                                           ========        ========        =======         ========
 
Cash dividends declared per share......    $   0.08              --             --               --
Weighted average common shares
  outstanding:
  Basic................................      18,701          14,287         14,313               --
  Diluted..............................      19,705          14,733         14,313               --
</TABLE>
 
                 See Notes to Consolidated Financial Statements

                                       29
<PAGE>   31
 
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                             (AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                      COMMON STOCK
                                      OUTSTANDING       ADDITIONAL
                                   ------------------    PAID-IN     RETAINED   SUBSCRIBED   TREASURY
                                   SHARES   PAR VALUE    CAPITAL     EARNINGS     STOCK       STOCK      TOTAL
                                   ------   ---------   ----------   --------   ----------   --------   --------
<S>                                <C>      <C>         <C>          <C>        <C>          <C>        <C>
PREDECESSOR COMPANY:
Balance at December 31, 1995.....       1     $  1       $109,748    $43,032      $  --      $    --    $152,781
Net income.......................      --       --             --     11,543         --           --      11,543
                                   ------     ----       --------    -------      -----      -------    --------
Balance at November 29, 1996.....       1     $  1       $109,748    $54,575      $  --      $    --    $164,324
                                   ======     ====       ========    =======      =====      =======    ========
FREEDOM SECURITIES CORPORATION:
Sale of common stock at November
  29, 1996 (including $3,947 of
  non-cash capital contributed by
  Hancock).......................  14,313     $143       $ 78,804    $    --      $  --      $  (219)   $ 78,728
Net income.......................      --       --             --        740         --           --         740
                                   ------     ----       --------    -------      -----      -------    --------
Balance at December 31, 1996.....  14,313      143         78,804        740         --         (219)     79,468
                                   ------     ----       --------    -------      -----      -------    --------
Sale of common stock.............     488        4          4,693         --         --           --       4,697
Net income.......................      --       --             --     18,698         --           --      18,698
Acquisition of treasury stock....     (97)      --             --         --         --         (537)       (537)
Reissuance of treasury stock.....      --       --            157         --       (913)         756          --
                                   ------     ----       --------    -------      -----      -------    --------
Balance at December 31, 1997.....  14,704      147         83,654     19,438       (913)          --     102,326
                                   ------     ----       --------    -------      -----      -------    --------
Sale of common stock.............     110        1          1,022         --         --           --       1,023
Issuance of subscribed stock.....     136        1             --         --        913           --         914
Initial public offering..........   4,200       42         75,699         --         --           --      75,741
Acquisition of Cleary Gull.......     876        9         19,932         --         --           --      19,941
Stock options exercised..........     129        1            687         --         --           --         688
Income tax benefit associated
  with stock options.............      --       --            397         --         --           --         397
Net income.......................      --       --             --     25,135         --           --      25,135
Dividends declared...............      --       --             --     (1,603)        --           --      (1,603)
Acquisition of treasury stock....     (76)      --             --         --         --       (1,172)     (1,172)
                                   ------     ----       --------    -------      -----      -------    --------
Balance at December 31, 1998.....  20,079     $201       $181,391    $42,970      $  --      $(1,172)   $223,390
                                   ======     ====       ========    =======      =====      =======    ========
</TABLE>
 
                 See Notes to Consolidated Financial Statements

                                       30
<PAGE>   32
 
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                                   PREDECESSOR
                                                                                                     COMPANY
                                                                                                  -------------
                                                                                    ONE MONTH        ELEVEN
                                                      YEAR ENDED     YEAR ENDED       ENDED       MONTHS ENDED
                                                     DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   NOVEMBER 29,
                                                         1998           1997           1996           1996
                                                     ------------   ------------   ------------   -------------
<S>                                                  <C>            <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.........................................   $  25,135      $  18,698      $     740       $  11,543
Adjustments to reconcile net income to net cash
  from operating activities:
  Depreciation.....................................       4,979          5,128            304           4,632
  Amortization.....................................       4,883          4,714            685           7,807
  Non-cash compensation............................         632          1,432             --              --
  Extraordinary item; write-off capitalized debt
    costs..........................................       2,198             --             --              --
Changes in assets and liabilities:
  (Increase) decrease in operating assets:
    Receivables from brokers and dealers...........      (8,123)        (8,910)        19,304         105,303
    Receivables from customers.....................          --             --             --         333,252
    Securities purchased under agreements to
      resell.......................................      (5,022)       (29,124)        31,212          92,052
    Securities owned, at market....................     175,114       (170,416)        37,698          57,720
    Deferred taxes.................................      (1,214)         1,540          5,488          (5,363)
    Other receivables..............................     (12,305)        (5,268)           (67)            542
    Other assets...................................      (5,144)        (1,328)        (1,545)         (2,807)
  Increase (decrease) in operating liabilities:
    Short-term loans from a Hancock affiliate......          --             --             --        (200,000)
    Short-term loans...............................          --             --             --        (107,745)
    Payables to brokers and dealers................      26,244        (15,069)       (33,027)        (39,937)
    Payables to customers..........................          --             --             --        (186,206)
    Securities sold under agreements to
      repurchase...................................      28,582        (44,976)        (5,061)        (91,795)
    Securities sold, not yet purchased, at
      market.......................................    (233,439)       253,425        (47,088)          7,517
    Accrued compensation and benefits..............      12,784         10,150          2,230             364
    Accounts payable and accrued expenses..........         984         (6,380)        (7,930)         11,060
                                                      ---------      ---------      ---------       ---------
Net cash provided by (used in) operating
  activities.......................................      16,288         13,616          2,943          (2,061)
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets..........................      (5,081)        (1,994)          (112)         (8,417)
Proceeds from sale of fixed assets.................          --            711             --              --
Payment for Cleary Gull, net of cash acquired......      (3,072)            --             --              --
Purchase of Predecessor Company....................          --             --       (180,000)             --
Acquisition related expenditures...................          --             --         (5,740)             --
                                                      ---------      ---------      ---------       ---------
Net cash used in investing activities..............      (8,153)        (1,283)      (185,852)         (8,417)
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net............       1,992          2,728         74,781              --
Proceeds from initial public offering, net.........      75,741             --             --              --
Proceeds from notes payable to banks...............          --             --        110,819          25,819
Purchases of treasury stock........................      (1,172)            --             --              --
Payment of dividends...............................      (1,603)            --             --              --
Repayment of notes payable to banks................     (84,737)        (9,373)            --              --
Repayment of notes payable to a Hancock
  affiliate........................................          --             --             --         (33,736)
                                                      ---------      ---------      ---------       ---------
Net cash provided by (used in) financing
  activities.......................................      (9,779)        (6,645)       185,600          (7,917)
 
Increase (decrease) in cash and cash equivalents...      (1,644)         5,688          2,691         (18,395)
Cash and cash equivalents, beginning of period.....      12,936          7,248          4,557          22,952
                                                      ---------      ---------      ---------       ---------
Cash and cash equivalents, end of period...........   $  11,292      $  12,936      $   7,248       $   4,557
                                                      =========      =========      =========       =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
  Income taxes.....................................   $  11,641      $  14,859      $   1,421       $  10,453
  Interest.........................................   $  26,851      $  28,338      $   1,246       $  22,912
</TABLE>
 
                 See Notes to Consolidated Financial Statements

                                       31
<PAGE>   33
 
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.  ORGANIZATION
 
     Freedom Securities Corporation is a holding company which together with its
wholly-owned subsidiaries (collectively, the "Company") is a full-service,
regionally focused retail brokerage and investment banking firm. The Company is
engaged primarily in the retail and institutional brokerage business including
corporate finance and underwriting services. The consolidated financial
statements include the accounts of the Company including its primary operating
subsidiaries: Tucker Anthony Incorporated ("Tucker Anthony"), Sutro & Co.
Incorporated ("Sutro"), Cleary Gull & Reiland Inc. ("Cleary Gull") and Freedom
Capital Management Corporation ("Freedom Capital").
 
     The Company was established to facilitate the buyout (the "Acquisition") of
Freedom Securities Holding Corporation (the "Predecessor Company"). Until
November 29, 1996, the Predecessor Company was a wholly-owned subsidiary of John
Hancock Mutual Life Insurance Company ("Hancock") (See Note 3).
 
     On April 2, 1998, the Company completed its initial public offering,
whereby 4.2 million shares of common stock were sold by the Company resulting in
net proceeds to the Company of $75.7 million (See Note 4).
 
     Tucker Anthony, headquartered in Boston and focused on the northeastern
United States, and Sutro, headquartered in San Francisco and focused on the
western United States, are full service regionally focused retail brokerage and
investment banking firms. Cleary Gull, headquartered in Milwaukee and focused
primarily on the midwestern United States, is an investment banking,
institutional brokerage and investment advisory firm which was acquired by the
Company in the second quarter of 1998 (See Note 5). Freedom Capital, the
Company's asset management subsidiary, is focused on public sector entities,
high net worth individuals and money market funds.
 
     Tucker Anthony, Sutro and Cleary Gull clear their securities transactions
on a fully disclosed basis through Wexford Clearing Services Corporation
("Wexford" or the "clearing broker"), a guaranteed wholly-owned subsidiary of
Prudential Securities Incorporated ("Prudential").
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Principles of Consolidation
 
     All significant intercompany accounts and transactions have been eliminated
in consolidation. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from these
estimates. Certain prior period amounts have been reclassified to conform with
the current period's financial statement presentation.
 
  Securities
 
     Securities transactions and related revenues and expenses are recorded on a
trade date basis. Securities owned and securities sold, not yet purchased are
stated at market value with related changes in unrealized appreciation or
depreciation reflected in principal transactions revenues. Securities sold, not
yet purchased represent obligations to deliver specified securities at
predetermined prices. The Company is obligated to acquire the securities sold
short at prevailing market prices in the future to satisfy these obligations.
Arbitrage positions included in securities owned and securities sold, not yet
purchased result from buying or selling a security subject to exchange,
conversion or reorganization and selling or buying the security or securities to
be received upon completion of the exchange, conversion or reorganization. The
Company may from time to time
 
                                       32
<PAGE>   34
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
enter into options and futures contracts. These contracts are valued at market
with related changes in unrealized appreciation or depreciation reflected in
principal transactions revenues.
 
  Investment Banking
 
     Investment banking revenues are recorded as follows: management fees as of
the offering date, sales commissions on the trade date and underwriting fees at
the time the underwriting is completed and the income is reasonably
determinable.
 
  Asset Management Fees
 
     The Company earns fees for investment advisory and custodial services
rendered to its clients. Fees are based on a percentage of the average market
value of net assets managed, a percentage of quarter-end market value of assets
managed or on a fee for account basis, depending on the type of client account.
These fees are recorded as earned and billed monthly or quarterly.
 
  Fixed Assets
 
     Furniture and fixtures are depreciated on a straight-line basis over their
estimated useful lives, generally three to ten years. Leasehold improvements are
amortized on a straight-line basis over the lesser of the economic useful lives
of the improvements or the terms of the respective leases. Fixed assets are
stated at cost net of accumulated depreciation and amortization of $7.7 million
and $2.4 million at December 31, 1998 and 1997, respectively.
 
  Intangibles
 
     Intangibles include debt issuance costs ($2.4 million at December 31,
1997), which are reported in other assets, and goodwill. Goodwill is stated at
cost net of accumulated amortization and is amortized on a straight-line basis
over fifteen years. Debt issuance costs, which were stated at cost net of
accumulated amortization and were being amortized on a straight-line basis over
five years, were written off in April 1998 in conjunction with the Company's
repayment of related debt (See Note 12) and are reflected as an after-tax
extraordinary item of $1.2 million in the consolidated statement of income for
the year ended December 31, 1998.
 
     The accumulated amortization of intangibles totaled $4.7 million and $2.7
million at December 31, 1998 and 1997, respectively.
 
  Stock Based Compensation
 
     The Company accounts for its stock-based compensation in accordance with
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees" and, accordingly, recognizes no compensation expense related to
stock option grants issued at fair market value. The Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," which encourages, but does not
require, companies to recognize compensation expense for grants of stock and
stock options based on the fair value of those instruments. The Company has
elected, as permitted by SFAS No. 123, to adopt the disclosure requirement of
SFAS No. 123 and continue to account for stock-based compensation under APB
Opinion No. 25.
 
  Income Taxes
 
     The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under this method, the Company recognizes taxes
payable or refundable for the current year and
 
                                       33
<PAGE>   35
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
deferred tax liabilities and assets for future consequences of events that have
been recognized in the Company's financial statements or tax returns.
 
     Through November 29, 1996, the Predecessor Company was included in the
consolidated U.S. Federal income tax return of Hancock. Pursuant to an agreement
with Hancock, the Predecessor Company's share of combined Federal income taxes
was equivalent to the total provision or benefit the Predecessor Company would
have recorded for such taxes had they been determined on a stand-alone basis.
 
  Cash Flows
 
     For purposes of reporting cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents. Cash flows for the year ended December 31, 1998 and the one month
period ended December 31, 1996 are shown net of the effects of the acquisitions
of Cleary Gull and the Predecessor Company, respectively.
 
  Accounting Pronouncements
 
     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement,
which is effective for fiscal years beginning after June 15, 1999, establishes
standards for the accounting and reporting of derivative instruments. The
Company does not expect the adoption of this statement to have a material impact
on the Company's consolidated financial statements.
 
3.  ACQUISITION FROM HANCOCK
 
     Under terms of a Contribution Agreement dated October 4, 1996 and
consummated on November 29, 1996 among Hancock, the Company, two private
investor groups and selected employee investors, Hancock contributed 100% of the
issued and outstanding capital stock of the Predecessor Company to the Company
in exchange for 4.999% of the issued and outstanding capital stock of the
Company and an aggregate consideration of $180 million. With the consummation of
the transactions under the Contribution Agreement, the Predecessor Company
became a wholly-owned subsidiary of the Company as of the close of business
November 29, 1996. Through November 29, 1996, the consolidated financial
statements present the financial condition, results of operations and cash flows
of the Predecessor Company and its subsidiaries.
 
     The Acquisition was accounted for as a purchase and, accordingly, the
purchase price was allocated to the assets and liabilities acquired based upon
their fair values at the date of the Acquisition. The purchase price, including
acquisition costs, exceeded the fair value of net assets acquired by $28.2
million and the excess was recorded as goodwill.
 
4.  INITIAL PUBLIC OFFERING
 
     On April 2, 1998, the Company completed its initial public offering of 7.4
million shares plus an over-allotment of 1.1 million shares (the "Offering"),
including 4.2 million shares of $.01 par value common stock ("Common Stock")
sold by the Company. The Offering raised approximately $75.7 million for the
Company after deducting underwriting discounts, commissions and expenses. The
Company used the proceeds and available cash to repay $77.5 million of existing
debt (See Note 12).
 
5.  ACQUISITION OF CLEARY GULL & REILAND INC.
 
     On Apri1 16, 1998, the Company closed into escrow and funded its
acquisition of Cleary Gull, a privately held, investment banking, institutional
brokerage, and investment advisory firm headquartered in Milwaukee, Wisconsin.
The acquisition was completed on May 1, 1998 after appropriate notification was
made to the New
 
                                       34
<PAGE>   36
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
York Stock Exchange and was accounted for under the purchase method of
accounting. The consolidated financial statements include the results of Cleary
Gull's operations from the date of acquisition. The purchase price, including
adjustments in accordance with provisions of the related acquisition agreement,
was $24.7 million which included 875,910 shares of the Company's Common Stock (a
portion of which is subject to a four year vesting period) valued at $17.4
million and $4.6 million in cash. In addition, stock options to purchase shares
of Cleary Gull capital stock with a value of $2.7 million were converted into
options to purchase shares of the Company's Common Stock. The excess of the
purchase price over the estimated fair value of net assets acquired, which was
recorded as goodwill, was $12.5 million and is being amortized over 15 years
using the straight-line method of amortization. The Company also granted options
to Cleary Gull employees to purchase an additional 239,250 shares of the
Company's Common Stock, subsequently canceled these options and re-issued
options to purchase 242,910 shares with an exercise price of $13.00 per share.
 
6.  RECEIVABLES FROM AND PAYABLES TO BROKERS AND DEALERS
 
     Included in the receivables from brokers and dealers are unsettled
proprietary trades and certain overnight funds with Prudential. Included in
payables to brokers and dealers are the amounts due to Wexford for
collateralized financing of proprietary positions and to the custodian of
Freedom Capital's money market funds. The Company's principal source of
short-term financing is provided by Wexford, from which the Company can borrow
on an uncommitted basis against its proprietary inventory positions, subject to
collateral maintenance requirements.
 
     The Company conducts business with brokers and dealers that are members of
the major securities exchanges. The Company monitors the credit standing of such
brokers and dealers, monitors the market value of collateral and requests
additional collateral as deemed appropriate.
 
     Amounts receivable from and payable to brokers and dealers consist of the
following (in thousands):
 
<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                       ------------------
                                                        1998       1997
                                                       -------    -------
<S>                                                    <C>        <C>
Receivables from brokers and dealers:
     Receivable from Prudential......................  $78,862    $46,129
     Unsettled proprietary trades, net...............      292     24,189
     Receivables from other brokers and dealers......    9,520      3,996
                                                       -------    -------
                                                       $88,674    $74,314
                                                       =======    =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                       ------------------
                                                        1998       1997
                                                       -------    -------
<S>                                                    <C>        <C>
Payables to Brokers and Dealers:
     Payable to Wexford..............................  $ 8,134    $16,633
     Payable to custodian............................   77,077     42,088
     Payables to other brokers and dealers...........       95        341
                                                       -------    -------
                                                       $85,306    $59,062
                                                       =======    =======
</TABLE>
 
7.  TRANSACTIONS WITH CUSTOMERS
 
     For transactions in which the Company, through Wexford, extends credit to
customers, the Company seeks to control the risks associated with these
activities by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. The Company and Wexford monitor
required margin levels daily and, pursuant to such guidelines, request customers
to deposit additional collateral or reduce securities positions when necessary.
 
                                       35
<PAGE>   37
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company has agreed to indemnify Wexford for losses that it may sustain
in connection with customer accounts introduced by the Company. At December 31,
1998 and 1997, there were no amounts known to the Company to be indemnified to
Wexford for these customer accounts.
 
8.  SHORT-TERM LOANS
 
     In periods prior to 1997, short-term loans with banks and a Hancock
affiliate were used to finance securities purchased by customers on margin and
proprietary inventory positions. Borrowings from the Hancock affiliate were on
an uncollateralized basis and bore interest at a rate approximating the
commercial paper rate of such affiliate. Interest expense related to these loans
was $12.1 million for the eleven months ended November 29, 1996.
 
9.  SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
 
     Securities purchased under agreements to resell and securities sold under
agreements to repurchase are treated as collateralized financing transactions,
and are carried at amounts at which the securities will be subsequently resold
or reacquired plus accrued interest. It is the Company's policy to take
possession or control of securities purchased under agreements to resell. The
Company is required to provide securities to counterparties in order to
collateralize repurchase agreements. The Company minimizes credit risk
associated with these activities by monitoring credit exposure and collateral
values on a daily basis and requiring additional collateral to be deposited or
returned when deemed appropriate.
 
10.  TRANSACTIONS WITH AFFILIATES
 
     Prior to November 29, 1996, the Predecessor Company had outstanding notes
payable to a Hancock affiliate which incurred interest at rates approximating
such affiliate's average cost of borrowing and were payable on demand. These
notes were repaid on November 29, 1996. Interest expense incurred relating to
these notes was $1.7 million for the eleven months ended November 29, 1996.
 
     The Predecessor Company participated in group insurance arrangements
arranged through Hancock and also received certain shared services. The
Predecessor Company paid Hancock its allocable share of the cost of such
insurance and other items, which amounted to $11.1 million during the eleven
months ended November 29, 1996. Subsequent to the Acquisition, the Company
continued to participate in the group insurance arrangements through Hancock
until June 30, 1997, when the Company obtained its own insurance arrangements.
The Company paid to Hancock its allocable share of the cost of such insurance
which amounted to $6.1 million and $0.8 million for the six month period ended
June 30, 1997 and the one month period ended December 31, 1996, respectively.
 
     Effective with the Acquisition, the Company entered into management
agreements, with certain shareholders, and agreed to pay annual management fees
totaling $0.3 million. These agreements terminated in 1998 upon the initial
public offering of the Company's Common Stock.
 
                                       36
<PAGE>   38
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11.  SECURITIES
 
     Securities owned and securities sold, not yet purchased are recorded at
market value and consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Securities Owned:
     Obligations of the U.S. government or its agencies.....  $ 27,214    $ 27,396
     State and municipal obligations........................    43,487      38,222
     Arbitrage securities...................................   133,017     291,023
     Other corporate obligations............................    30,474      51,709
     Other corporate stocks and warrants....................    18,286      15,172
                                                              --------    --------
                                                              $252,478    $423,522
                                                              ========    ========
Securities Sold, Not Yet Purchased:
     Obligations of the U.S. government or its agencies.....  $ 18,775    $ 22,890
     State and municipal obligations........................     1,398       1,519
     Arbitrage securities...................................    93,569     322,316
     Other corporate obligations............................     1,712       1,356
     Other corporate stocks and warrants....................     8,694       6,484
                                                              --------    --------
                                                              $124,148    $354,565
                                                              ========    ========
</TABLE>
 
12.  NOTES PAYABLE TO BANKS
 
     Included in notes payable to banks is the Company's borrowing for fixed
asset financing of approximately $16.7 million and $21.4 million at December 31,
1998 and 1997, respectively, which bears interest at 8.02% annually and is
payable in equal monthly installments through December 2001. This note is
collateralized by furniture, fixtures and leasehold improvements.
 
     In August 1998, the Company entered into a new unsecured revolving credit
agreement (the "Credit Agreement") whereby participating banks have made
commitments totaling $50 million. Under the Credit Agreement, the Company has
the option to borrow at the federal funds rate or the eurodollar rate (each plus
applicable margin as defined, ranging from 0.50% to 0.75% based on a calculated
leverage ratio) or the lender's base rate. Borrowings under the Credit Agreement
may be prepaid without penalty and the agreement matures on August 21, 2001.
Additionally, the Company must pay a quarterly commitment fee calculated at
0.15% per year on the unused facility. Under financial covenants of the Credit
Agreement the Company must maintain a minimum net worth and debt to net worth
ratio. At December 31, 1998, the Company was in compliance with these covenants
and did not have any borrowings under the Credit Agreement.
 
     Prior to August 1998, the Company maintained a revolving credit agreement
with certain participating banks and at December 31, 1997 had $80 million in
borrowings outstanding. On April 7, 1998, the $77.5 million balance then
outstanding under this revolving credit agreement was repaid in full with the
Company's net proceeds from the Offering and available cash.
 
     The aggregate amount of principal repayment requirements on the fixed asset
notes payable at December 31, 1998 is as follows by year (in thousands):
 
<TABLE>
<CAPTION>
YEAR
----
<S>                                                             <C>
1999........................................................    $5,131
2000........................................................     5,558
2001........................................................     6,020
</TABLE>
 
                                       37
<PAGE>   39
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
13.  INCOME TAXES
 
     The components of income tax expense (benefit) are (in thousands):
 
<TABLE>
<CAPTION>
                                                                          ONE MONTH      ELEVEN MONTHS
                                          YEAR ENDED      YEAR ENDED        ENDED            ENDED
                                         DECEMBER 31,    DECEMBER 31,    DECEMBER 31,    NOVEMBER 29,
                                             1998            1997            1996            1996
                                         ------------    ------------    ------------    -------------
<S>                                      <C>             <C>             <C>             <C>
Federal:
  Current..............................    $13,358         $ 7,693           $581           $9,422
  Deferred.............................       (575)          1,482           (148)          (3,930)
State:
  Current..............................      5,847           4,501            300            4,784
  Deferred.............................       (447)             61            (53)          (1,432)
                                           -------         -------           ----           ------
                                           $18,183         $13,737           $680           $8,844
                                           =======         =======           ====           ======
</TABLE>
 
     The effective income tax differs from the amount computed by applying the
Federal statutory income tax rate as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                          ONE MONTH      ELEVEN MONTHS
                                          YEAR ENDED      YEAR ENDED        ENDED            ENDED
                                         DECEMBER 31,    DECEMBER 31,    DECEMBER 31,    NOVEMBER 29,
                                             1998            1997            1996            1996
                                         ------------    ------------    ------------    -------------
<S>                                      <C>             <C>             <C>             <C>
Federal statutory income tax...........    $15,608         $11,352           $497           $7,136
State and local income taxes, net of
  federal tax benefits.................      3,510           2,965            160            2,179
Tax exempt interest, net...............       (702)           (770)           (53)            (570)
Other, net.............................       (233)            190             76               99
                                           -------         -------           ----           ------
Effective income tax...................    $18,183         $13,737           $680           $8,844
                                           =======         =======           ====           ======
</TABLE>
 
     The temporary differences which created deferred tax assets and liabilities
are included as a net amount in other assets at December 31, 1998 and 1997 as
follows (in thousands):
 
<TABLE>
<CAPTION>
                                                               1998       1997
                                                              -------    ------
<S>                                                           <C>        <C>
Deferred tax assets:
     Deferred compensation..................................  $ 5,038    $5,990
     Reserves...............................................    3,256     2,042
     Other..................................................    3,202     2,118
                                                              -------    ------
          Total deferred tax assets.........................   11,496    10,150
Deferred tax liabilities:
     Net unrealized appreciation on investments.............       --       421
     Other..................................................    1,019       466
                                                              -------    ------
          Total deferred tax liabilities....................    1,019       887
                                                              -------    ------
Net deferred tax asset......................................  $10,477    $9,263
                                                              =======    ======
</TABLE>
 
     At December 31, 1996, the Company had net operating loss carryforwards
("NOLs") related to the original acquisition of Sutro of $3.2 million for which
it had recorded a valuation allowance against the full amount of the deferred
tax asset. These NOLs were fully utilized in 1997 resulting in a reduction to
taxes payable but without a reduction to reported income tax expense since the
offset was reported as an adjustment to goodwill.
 
                                       38
<PAGE>   40
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
14.  NET CAPITAL REQUIREMENTS
 
     Certain subsidiaries of the Company are subject to the net capital
requirements of the New York Stock Exchange ("Exchange") and the Uniform Net
Capital requirements of the Securities and Exchange Commission ("Commission")
under Rule 15c3-1. The Exchange and the Commission requirements also provide
that equity capital may not be withdrawn or cash dividends paid if certain
minimum net capital requirements are not met. The Company's principal regulated
subsidiaries are discussed below.
 
     Under the clearing arrangement with Wexford, Tucker Anthony, Sutro and
Cleary Gull are required to maintain certain minimum levels of net capital and
comply with other financial ratio requirements. At December 31, 1998, Tucker
Anthony, Sutro and Cleary Gull were in compliance with all such requirements.
 
     Tucker Anthony is a registered broker and dealer. At December 31, 1998,
Tucker Anthony had net capital of approximately $57.1 million which was $56.1
million in excess of the $1.0 million amount required to be maintained at that
date.
 
     Sutro is a registered broker and dealer. At December 31, 1998, Sutro had
net capital of approximately $13.9 million which was $12.9 million in excess of
the $1.0 million amount required to be maintained at that date.
 
     Cleary Gull is a registered broker and dealer. At December 31, 1998, Cleary
Gull had net capital of approximately $5.2 million which was $4.4 million in
excess of the $0.8 million amount required to be maintained at that date.
 
     Freedom Trust Company ("FTC") is a subsidiary of Freedom Capital and is a
limited purpose trust company. Pursuant to state regulations, FTC is required to
meet and maintain certain capital minimums and ratios. At December 31, 1998,
FTC's regulatory capital, as defined, was $1.2 million and FTC was in compliance
with all such requirements.
 
15.  COMMITMENTS AND CONTINGENCIES
 
     The Company leases office space and various types of equipment under
noncancelable leases generally varying from one to ten years, with certain
renewal options for like terms. Occupancy and equipment expense includes net
rentals of $18.3 million and $15.9 million for the years ended December 31, 1998
and 1997, respectively, $1.5 million for the one month period ended December 31,
1996 and $22.5 million for the eleven month period ended November 29, 1996.
Included in rent expense for the eleven month period ended November 29, 1996 was
$4.7 million of expense related to the present value of future rent costs for
space no longer required due primarily to the outsourcing of clearing services.
 
     At December 31, 1998, the Company's future minimum rental commitments based
upon original terms (including escalation costs) under noncancelable leases
which have an initial or remaining term of one year or more are as follows (in
thousands):
 
<TABLE>
<CAPTION>

YEAR
----
<S>                                                           <C>
1999........................................................  $ 19,517
2000........................................................    17,569
2001........................................................    16,863
2002........................................................    16,192
2003........................................................    14,504
Thereafter..................................................    19,326
                                                              --------
     Sub-total..............................................   103,971
Less aggregate sublease income..............................    (3,553)
                                                              --------
                                                              $100,418
                                                              ========
</TABLE>
 
                                       39
<PAGE>   41
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company is a defendant or co-defendant in legal actions primarily
relating to its broker-dealer activities. It is the opinion of management that
the resolution of these legal actions will not have a material adverse effect on
the consolidated financial position or results of operations of the Company.
Included in other operating expenses, for the eleven month period ended November
29, 1996, is $6.3 million of insurance recoveries relating to certain litigation
costs that were incurred in prior years.
 
     The Company has outstanding underwriting agreements and when-issued
contracts which commit it to purchase securities at specified future dates and
prices. The Company presells such issues to manage risk exposure related to
these off-balance sheet commitments. Transactions which were open at December
31, 1998 have subsequently settled and had no material effect on the
consolidated statements of income and financial condition.
 
     In accordance with the provisions of the Credit Agreement (See Note 12),
several of the Company's subsidiaries have executed agreements to guarantee the
borrowings of the Company to the benefit of the participating banks.
 
16.  BENEFITS
 
     Certain subsidiaries of the Company have qualified profit-sharing plans
which cover substantially all their full-time employees. Each plan includes a
salary reduction agreement and a matching contribution subject to certain
limitations. In addition, a subsidiary may contribute additional amounts to its
plan, at its discretion, based upon its profits for the year.
 
     The aggregate contributions to these plans for the years ended December 31,
1998 and 1997, the one month period ended December 31, 1996 and the eleven month
period ended November 29, 1996 were $5.0 million, $7.1 million, $0.5 million and
$5.5 million, respectively.
 
     Freedom Capital has a noncontributory defined benefit pension plan covering
substantially all of its employees. Effective August 1, 1997, the plan was
amended to provide that no new pension benefits would accrue and no new
participants would be admitted after August 1, 1997. Amounts related to the plan
are not material to the consolidated financial statements.
 
     Compensation costs recognized for Common Stock and stock options issued to
employees during 1998 and 1997 were $0.6 million and $1.4 million, respectively.
 
17.  FINANCIAL INSTRUMENTS
 
     Substantially all of the Company's financial instruments are carried at
fair value or amounts approximating fair value. Assets, including cash and cash
equivalents, securities owned, securities purchased under agreements to resell
and certain receivables are carried at fair value or contracted amounts which
approximate fair value. Similarly, liabilities including securities sold, not
yet purchased, securities sold under agreements to repurchase and certain
payables are carried at fair value or contracted amounts approximating fair
value.
 
     The fair value of the fixed asset financing, estimated using the Company's
incremental borrowing rate, approximated its carrying value at December 31, 1998
and 1997. The carrying value of the Company's debt under the former revolving
credit agreement at December 31,1997 approximated its fair value.
 
     In the normal course of business, the Company may enter into transactions
in financial instruments to manage its exposure to market risks. At December 31,
1998 and 1997, the Company had equity and futures options outstanding
approximating $11.3 and $34.5 million, respectively (notional amounts). The
notional amounts are not reflected on the consolidated statements of financial
condition and are indicative only of the volume of activity at December 31, 1998
and 1997. They do not represent amounts subject to market risks and, in many
cases, limit the Company's overall exposure to market losses by hedging other
on-balance sheet
 
                                       40
<PAGE>   42
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
and off-balance sheet transactions. The volume of activity in these contracts
was not significant during the years ended December 31, 1998, 1997 and 1996.
 
18.  EARNINGS PER COMMON SHARE
 
     The Company computes its earnings per share in accordance with SFAS No.
128, "Earnings Per Share." The following table sets forth the computation for
basic and diluted earnings per share (in thousands, except per share amounts):
 
<TABLE>
<CAPTION>
                                              YEAR ENDED          YEAR ENDED        ONE MONTH ENDED
                                             DECEMBER 31,        DECEMBER 31,        DECEMBER 31,
                                                 1998                1997                1996
                                           -----------------   -----------------   -----------------
                                            BASIC    DILUTED    BASIC    DILUTED    BASIC    DILUTED
                                            -----    -------    -----    -------    -----    -------
<S>                                        <C>       <C>       <C>       <C>       <C>       <C>
Numerator:
     Net income before extraordinary
       item..............................  $26,411   $26,411   $18,698   $18,698   $   740   $   740
     Less: extraordinary item (net of tax
       of $922)..........................   (1,276)   (1,276)       --        --        --        --
                                           -------   -------   -------   -------   -------   -------
     Net income after extraordinary
       item..............................  $25,135   $25,135   $18,698   $18,698   $   740   $   740
Denominator:
     Weighted average shares
       outstanding.......................   18,701    18,701    14,287    14,287    14,313    14,313
     Dilutive effect of:
          Stock options and other
            exercisable shares (a).......       --     1,004        --       446        --        --
                                           -------   -------   -------   -------   -------   -------
     Adjusted weighted average shares
       outstanding.......................   18,701    19,705    14,287    14,733    14,313    14,313
Earnings Per Share:
     Earnings per share before
       extraordinary item................  $  1.41   $  1.34   $  1.31   $  1.27   $  0.05   $  0.05
     Less: extraordinary item (net of
       tax)..............................    (0.07)    (0.06)       --        --        --        --
                                           -------   -------   -------   -------   -------   -------
     Earnings per share after
       extraordinary item................  $  1.34   $  1.28   $  1.31   $  1.27   $  0.05   $  0.05
</TABLE>
 
---------------
(a) Options to purchase 239,553 shares of the Company's Common Stock were
    outstanding during 1998 but were not included in the computation of diluted
    earnings per share. The inclusion of such options would have an antidilutive
    effect on the diluted earnings per share calculation because the exercise
    price of these options was greater than the average market price of the
    Company's common shares for 1998.
 
19.  INCENTIVE PLANS
 
     The Company has adopted a number of compensation plans to attract, retain
and motivate officers and other key employees to compensate them for their
contributions to growth and profits of the Company and to encourage employee
stock ownership.
 
                                       41
<PAGE>   43
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Stock Option Plans
 
     The Company has two stock option plans under which officers and other key
employees are granted stock options, stock appreciation rights, restricted stock
and long-term performance awards at the fair market value of the stock on the
date of the grant or on such terms as the administrators, a committee of
non-employee directors, may select. Some of the options are currently
exercisable and others vest over the next four years if certain individual and
Company performance-based goals are met. The options expire within ten years
from the date of the grant. There was no option activity prior to 1997. The
activity during the years ended December 31, 1997 and 1998 is set forth below:
 
<TABLE>
<CAPTION>
                                                               EXERCISE PRICE   WEIGHTED-AVERAGE
                                            NUMBER OF SHARES     PER SHARE      EXCERCISE PRICE
                                            ----------------   --------------   ----------------
<S>                                         <C>                <C>              <C>
Options outstanding at December 31,
  1996....................................            --       $          --         $   --
Granted...................................     2,336,652                5.50           5.50
Exercised.................................            --                  --             --
Terminated................................      (202,764)               5.50           5.50
                                               ---------
Options outstanding at December 31, 1997
  (276,247 exercisable)...................     2,133,888       $        5.50         $ 5.50
Granted...................................     1,119,066        4.95 - 20.00          13.21
Exercised.................................      (128,618)        4.95 - 5.70           5.35
Terminated................................      (327,291)       5.50 - 20.00          16.10
                                               ---------
Options outstanding at December 31, 1998
  (633,669 exercisable)...................     2,797,045       $4.95 - 13.00         $ 7.35
                                               =========       =============         ======
</TABLE>
 
     The following table summarizes information about stock options outstanding
at December 31, 1998:
 
<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING
                          ---------------------------------   WEIGHTED-AVERAGE           OPTIONS EXERCISABLE
                                               WEIGHTED-         REMAINING       -----------------------------------
RANGE OF EXERCISE         NUMBER OF SHARES      AVERAGE       CONTRACTUAL LIFE   NUMBER OF SHARES   WEIGHTED-AVERAGE
PRICES PER SHARE            OUTSTANDING      EXERCISE PRICE       (YEARS)          EXERCISABLE       EXERCISE PRICE
-----------------         ----------------   --------------   ----------------   ----------------   ----------------
<S>                       <C>                <C>              <C>                <C>                <C>
$4.95 -- 5.49...........        67,855           $4.95              9.42              67,855             $4.95
 5.50 -- 5.69...........     2,034,030            5.50              7.56             565,814              5.50
 5.70 -- 13.00..........       695,160           13.00              9.83                  --                --
                             ---------                                               -------
$4.95 -- 13.00..........     2,797,045           $7.35              8.17             633,669             $5.44
                             =========                                               =======
</TABLE>
 
                                       42
<PAGE>   44
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company accounts for stock option grants in accordance with APB Opinion
No. 25. Pro forma information regarding net income and earnings per share is
required under SFAS No. 123 and has been determined as if the Company had
accounted for all 1998 and 1997 stock option grants based on the fair value
method. The pro forma information presented below is not representative of the
effect stock options will have on pro forma net income or earnings per share for
future years. The pro forma information for 1998 and 1997 was as follows (in
thousands, except per share amounts):
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                              1998       1997
-----------------------                                              ----       ----
<S>                                                  <C>            <C>        <C>
Net income.........................................  As reported    $25,135    $18,698
                                                     Pro forma      $23,610    $18,318
Earnings per common share:
     Basic after extraordinary item................  As reported    $  1.34    $  1.31
     Basic after extraordinary item................  Pro forma      $  1.26    $  1.28
     Diluted after extraordinary item..............  As reported    $  1.28    $  1.27
     Diluted after extraordinary item..............  Pro forma      $  1.22    $  1.26
</TABLE>
 
     The fair value of each option granted during the year ended December 31,
1998 and 1997 is the estimated present value at grant date. The fair value of
1998 options was estimated using the Black-Scholes option pricing model whereby
the expected volatility was based on average volatilities of similar companies.
The fair value of 1997 options was estimated using the minimum value model. The
following weighted-average assumptions were used for 1998 and 1997,
respectively:
 
     - dividend yield of 1.4% and 0.8%, respectively
 
     - expected life of 8 and 6 years, respectively
 
     - risk free interest rate of 5.1% and 5.4%, respectively
 
     - expected volatility of 56.2% in 1998
 
     The weighted-average fair value of options granted during 1998 and 1997
whose exercise price equals the fair market value of the Company's stock on
grant date was $7.47 and $1.30, respectively. The weighted-average fair value of
options granted during 1998 and 1997 whose exercise price is less than the fair
market value of the Company's stock on grant date was $7.71 and $4.37,
respectively.
 
  1998 Employee Stock Purchase Plan
 
     The Employee Stock Purchase Plan (the "ESPP") allows eligible employees to
invest from 1% to 10% of their compensation to purchase shares of the Company's
Common Stock at a price equal to 85% of its fair market value. The Company has
reserved 500,000 shares for purchase by employees under the ESPP and, through
December 31, 1998, 44,836 shares have been purchased.
 
                                       43
<PAGE>   45
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
20.  SEGMENT REPORTING DATA
 
     In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The Company has two reportable segments:
broker-dealer and asset management. The Company's broker-dealer segment includes
the retail operations, equity capital markets and trading businesses of its
three brokerage subsidiaries, Tucker Anthony, Sutro and Cleary Gull, since they
generally offer similar products and services and are subject to uniform
regulatory requirements. The Company offers its broker-dealer clients a wide
range of products and services, including retail brokerage, investment banking,
institutional sales and fixed income products. The asset management segment
includes the Company's asset management subsidiary, Freedom Capital, Cleary
Gull's Investment Management Services group and asset management business from
Tucker Anthony and Sutro. The Company offers its asset management clients
investment advisory, portfolio management and custodial services. Substantially
all of the Company's business is transacted in the United States. The following
table presents information about reported segments (amounts in thousands):
 
<TABLE>
<CAPTION>
                                                                       ASSET
                                                     BROKER-DEALER   MANAGEMENT   OTHER (a)    TOTAL
                                                     -------------   ----------   ---------   --------
<S>                                                  <C>             <C>          <C>         <C>
Year Ended December 31, 1998
     Operating revenues............................    $367,603       $47,294      $   467    $415,364
     Income (loss) before income taxes.............      36,038        10,630       (2,074)     44,594
     Total assets..................................     463,594        92,142       50,514     606,250
Year Ended December 31, 1997
     Operating revenues............................    $320,248       $34,376      $   562    $355,186
     Income (loss) before income taxes.............      30,723         7,178       (5,466)     32,435
     Total assets..................................     620,707        58,580       48,300     727,587
One Month Ended December 31, 1996
     Operating revenues............................    $ 25,101       $ 2,202      $     1    $ 27,304
     Income (loss) before income taxes.............       1,208           554         (342)      1,420
     Total assets..................................     408,207        53,330       55,415     516,952
Predecessor Company
Eleven Months Ended November 29, 1996
     Operating revenues............................    $270,646       $30,601      $   124    $301,371
     Income (loss) before income taxes.............      17,037         5,640       (2,290)     20,387
     Total assets..................................     492,463        50,897       67,527     610,887
</TABLE>
 
---------------
(a) Other reflects the activities of the Company's holding companies. Income
    (loss) before income taxes principally includes amortization of goodwill and
    acquisition interest expense related to financing the Acquisition. Total
    assets primarily consist of goodwill and deferred taxes.
 
                                       44
<PAGE>   46
                       FREEDOM SECURITIES CORPORATION AND
         FREEDOM SECURITIES HOLDING CORPORATION ("PREDECESSOR COMPANY")
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
21.  QUARTERLY INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED):
 
<TABLE>
<CAPTION>
                                          FIRST         SECOND          THIRD          FOURTH
                                         QUARTER       QUARTER         QUARTER         QUARTER
                                         --------    ------------    ------------    -----------
<S>                                      <C>         <C>             <C>             <C>
1998
Net revenues...........................  $100,110(a) $    121,661(a) $     99,862(a) $   118,743(a)
Income before income taxes.............     8,596          13,238          10,621         12,139
Net income before extraordinary item...     5,029           7,635           6,670          7,077
Extraordinary item (net of tax of
  $922)................................        --           1,276              --             --
Net income after extraordinary item....     5,029           6,359           6,670          7,077
Earnings per share:
     Basic before extraordinary item...  $   0.34    $       0.39    $       0.33    $      0.35
     Basic after extraordinary item....      0.34            0.32            0.33           0.35
     Diluted before extraordinary
       item............................      0.32            0.36            0.32           0.34
     Diluted after extraordinary
       item............................      0.32            0.30            0.32           0.34
Stock price range(b):
     High..............................        --    $      23.13    $      21.50    $     19.00
     Low...............................        --    $      17.19    $      11.69    $      9.38
 
1997
Net revenues...........................  $ 84,777(a) $     85,310(a) $    103,912(a) $   102,815(a)
Income before income taxes.............     6,043           5,040          10,464         10,888
Net income.............................     3,493           2,918           5,967          6,320
 
Basic earnings per share...............  $   0.25    $       0.20    $       0.42    $      0.44
Diluted earnings per share.............      0.24            0.20            0.41           0.42
</TABLE>
 
---------------
 
(a) Amounts have been reclassified to conform with fourth quarter 1998 financial
    statement presentation.
 
(b) Prices represent the range of sales per share on the New York Stock Exchange
    since the Company's public offering on April 2, 1998.
 
22.  SUBSEQUENT EVENTS (UNAUDITED)
 
     In January 1999, the Company acquired the investment and municipal banking
firm of Hopper Soliday & Co., Inc. ("Hopper Soliday"), and merged it with Tucker
Anthony. The total purchase price approximated $9 million paid in cash. Hopper
Soliday had revenues of approximately $20 million and after-tax net income of
approximately $2.6 million for the year ended December 31, 1998.
 
     In February 1999, the Company, through its Sutro subsidiary, acquired
Charter Investment Group, Inc. ("Charter"), a brokerage firm based in Portland,
Oregon. The total purchase price approximated $3.7 million, of which $465,000
was paid in cash and the remainder paid with shares of the Company's Common
Stock. Charter had 1998 revenues of approximately $7.5 million and had
approximately $900 million in brokerage accounts as of December 31, 1998.
 
     In January 1999, the Company purchased 494,748 shares from SCP Private
Equity Partners, L.P., one of the original equity investors in the Company, at
$15.56 per share. The purchase was funded from operations of the Company.
 
     In January 1999, the Company refinanced certain of its existing fixed
assets and secured financing for a $4.7 million upgrade of its computer system.
This new financing bears interest at 5.15% annually and is payable in equal
monthly installments through May 2003.
 
                                       45
<PAGE>   47
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     None.
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information required in Item 10 will be contained in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the close of the fiscal year for which this Report is filed and is
incorporated herein by reference.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
     The information required in Item 11 will be contained in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the close of the fiscal year for which this Report is filed and is
incorporated herein by reference.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required in Item 12 will be contained in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the close of the fiscal year for which this Report is filed and is
incorporated herein by reference.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required in Item 13 will be contained in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the close of the fiscal year for which this Report is filed and is
incorporated herein by reference.
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
     (a) (1) Financial Statements
 
        A listing of all financial statements filed as part of this Annual
Report on Form 10-K is included in Item 8.
 
        (2) Financial Statement Schedules
 
        All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
 
        (3) Exhibits
 
        The exhibits listed on the accompanying Index to Exhibits are filed as
part of this Annual Report on Form 10-K.
 
     (b) (1) Reports on Form 8-K
 
        None.
 
                                       46
<PAGE>   48
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                            /s/ JOHN H. GOLDSMITH
                                            ------------------------------------
                                            JOHN H. GOLDSMITH
                                            CHAIRMAN OF THE BOARD,
                                            CHIEF EXECUTIVE OFFICER AND DIRECTOR
 
Date: March 30, 1999
 
     Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 30th day of March, 1999.
 
<TABLE>
<C>                                                    <S>
               /s/ JOHN H. GOLDSMITH
---------------------------------------------------    Chairman of the Board, Chief Executive Officer
                 JOHN H. GOLDSMITH                     (Principal Executive Officer) and Director
 
            /s/ WILLIAM C. DENNIS, JR.                 Executive Vice President, Chief Financial
---------------------------------------------------    Officer (Principal Financial and Accounting
              WILLIAM C. DENNIS, JR.                   Officer)
 
                /s/ JOHN F. LUIKART
---------------------------------------------------
                  JOHN F. LUIKART                      Director
 
               /s/ DAVID P. PROKUPEK
---------------------------------------------------
                 DAVID P. PROKUPEK                     Director
 
               /s/ ROBERT H. YEVICH
---------------------------------------------------
                 ROBERT H. YEVICH                      Director
 
                /s/ C. HUNTER BOLL
---------------------------------------------------
                  C. HUNTER BOLL                       Director
 
             /s/ WINSTON J. CHURCHILL
---------------------------------------------------
               WINSTON J. CHURCHILL                    Director
 
               /s/ THOMAS M. HAGERTY
---------------------------------------------------
                 THOMAS M. HAGERTY                     Director
 
               /s/ DAVID V. HARKINS
---------------------------------------------------
                 DAVID V. HARKINS                      Director
 
                /s/ HUGH R. HARRIS
---------------------------------------------------
                  HUGH R. HARRIS                       Director
 
                 /s/ SETH W. LAWRY
---------------------------------------------------
                   SETH W. LAWRY                       Director
</TABLE>
 
                                       47
<PAGE>   49
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER     DESCRIPTION OF DOCUMENT
-------    -----------------------
<C>        <S>
+  3.1     Restated Certificate of Incorporation of the Company
+  3.2     Bylaws of the Company
+ 10.1     Contribution Agreement by and among the Company, Hancock,
           THL and SCP Private Equity Partners, L.P., dated as of
           October 4, 1996
+ 10.2     Stockholders Agreement by and among the Company and the
           persons listed on the signature pages thereof as the Initial
           Investors, SCP Initial Investor, Employee Investors and
           Seller Initial Investor dated as of November 30, 1996
+ 10.3     Additional Share Agreement by and between the Company and
           Hancock, dated as of November 29, 1996
+ 10.4     Tax Matters Agreement by and between the Company and
           Hancock, dated as of November 29, 1996
+ 10.5     Contribution and Indemnity Agreement by and between the
           Company and John H. Goldsmith, dated as of November 29, 1996
+ 10.6     Management Agreement by and between the Company and THL,
           dated as of November 29, 1996
+ 10.7     Management Agreement by and between the Company and SCP,
           dated as of November 29, 1996
+ 10.8     1996 Stock Option Plan
+ 10.9     Employment Agreement by and between the Company and John H.
           Goldsmith, dated as of November 29, 1996
+10.10     Letter Agreement by and between the Company and William C.
           Dennis, Jr., dated as of April 2, 1997
+10.11     Agreement, by and among Prudential Securities Incorporated,
           John Hancock Clearing Corporation, Tucker Anthony
           Incorporated and Sutro & Co. Incorporated
+10.12     Form of TAMP Incentive Plan Limited Partnership, Limited
           Partnership Agreement, dated as of July 1, 1989
+10.13     Form of TAMP II Incentive Plan Limited Partnership, Limited
           Partnership Agreement, dated as of February 28, 1995
+10.14     Form of TAMM II Incentive Plan Limited Partnership, Limited
           Partnership Agreement, dated as of April 8, 1984
+10.15     Form of Sutro Venture Partners I, L.P. Limited Partnership
           Agreement, dated as of March 21, 1996
+10.16     Form of Sutro Venture Partners II, L.P. Limited Partnership
           Agreement, dated as of March 21, 1996
+10.17     Form of Operating Agreement for Sutro Investment Partners
           IV, LLC dated as of June 30, 1997
++10.18    Agreement and Plan of Merger, by and among the Company, CGRM
           Merger Corp. and Cleary Gull Reiland & McDevitt Inc., dated
           March 9, 1998
++10.19    Cleary Gull Registration Rights Agreement
++10.20    Chattel Leasing Security Agreement by and between T.A.
           Leasing, Inc. and BancBoston Leasing, Inc., dated November
           29, 1996
++10.21    Amended and Restated Chattel Leasing Promissory Note, by and
           between T.A. Leasing, Inc. and BancBoston Leasing, Inc.,
           dated February 28, 1997
++10.22    Chattel Leasing Security Agreement by and between Sutro
           Leasing Inc. and BancBoston Leasing, Inc., dated February
           28, 1997
++10.23    Chattel Leasing Promissory Note by and between Sutro Leasing
           Inc. and BancBoston Leasing, Inc., dated February 28, 1997
++10.24    1998 Long Term Incentive Plan
++10.25    1998 Executive Performance Bonus Plan
</TABLE>
 
                                       48
<PAGE>   50

<TABLE>
<CAPTION>
EXHIBIT
NUMBER     DESCRIPTION OF DOCUMENT
-------    -----------------------
<C>        <S>
++10.26    Amendment No. 1 to the Stockholders Agreement dated January
           30, 1998
++10.27    Form of Amendment No. 2 to the Stockholders Agreement
++10.28    Form of Amendment No. 3 to the Stockholders Agreement
++10.29    David P. Prokupek Employment Agreement, dated as of March 9,
           1998
++10.30    Revolving Credit Agreement, by and among the Company,
           BankBoston, N.A., and the other banks party thereto, dated
           as of August 21, 1998
+++10.31   John F. Luikart Employment Agreement, dated as of September
           15, 1998
++10.32    Kevin J. McKay Employment Agreement, dated as of September
           15, 1998
 10.33     Form of Sutro Venture Partners III, L.P. Limited Partnership
           Agreement, dated as of December 15, 1998.
 10.34     Form of Sutro Venture Partners IV, L.P. Limited Partnership
           Agreement, dated as of December 15, 1998.
 10.35     Amendment to Clearing Agreement (September 8, 1995), dated
           as of April 23, 1998
 21        Subsidiaries of the Company
 23        Consent of Ernst & Young, LLP, Independent Auditors
 27        Financial Data Schedule
</TABLE>
 
---------------
+ Incorporated by reference to the Company's registration statement on Form S-1
  (File No. 333-44938)
 
++ Incorporated by reference to the Company's registration statement on Form S-1
   (File No. 333-62857)
 
     Schedules and exhibits to certain exhibits to this Form 10-K have been
omitted, which schedules shall be furnished to the Commission upon request.
 
                                       49